FRB: Oil Shocks and External Adjustment

International Finance Discussion Papers

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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Keywords
Oil-price shocks, trade, DSGE models

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