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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Oil Shocks and External Adjustment
Martin Bodenstein, Christopher J. Erceg, and Luca Guerrieri
2007-897  (June 2007, latest version May 2010)

Abstract:  In a two country DSGE model, a shock that raises the price of oil persistently, e.g. an oil supply shock, leads to a deterioration in the oil balance of an oil importing country, such as the United States. With a low oil price elasticity and incomplete financial markets, the increased transfers to the oil exporter are substantial and generate a powerful drag on wealth for the oil importer. This wealth effect is principally responsible for compressing consumption and investment, an exchange rate depreciation, and a surplus in the nonoil balance.

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Oil-price shocks, trade, DSGE models

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