The Impact of Energy Prices on Growth and Welfare in a Developing Open Economy |
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Authors: | Stefan F Schubert Stephen J Turnovsky |
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Institution: | (1) Free University of Bozen-Bolzano, 39100 Bolzano, Italy;(2) Department of Economics, University of Washington, Box 353330, Seattle, WA 98195, USA;; |
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Abstract: | This paper analyzes the impact of an increase in the price of energy (oil) on the growth and welfare of a small developing
economy. We consider the extent to which the impacts of energy price shocks depend upon the economy’s internal production
structure and its access to the world financial market. We find that the effect on the long-run growth rate depends heavily
on the former and is independent of the latter. The effect of accessibility to the world financial market on long-run welfare
depends heavily on the elasticity of substitution in production. We supplement the formal analysis with numerical simulations,
thereby enabling us to characterize the short-run dynamics. Overall, the simulations can replicate much of the empirical evidence
used to characterize the effects of the recent oil price increases on the economy. They also highlight the sensitivity of
the effect of the energy price to the elasticity of substitution. |
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