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A NOTE ON OIL DEPENDENCE AND ECONOMIC INSTABILITY

Published online by Cambridge University Press:  01 November 2008

Luís Aguiar-Conraria  and
Yi Wen
Luís Aguiar-Conraria*
Affiliation:
NIPE and Universidade do Minho
Yi Wen
Affiliation:
Federal Reserve Bank of St. Louis
*
Address correspondence to: Luís Aguiar-Conraria, Departamento de Economia, Universidade do Minho, Campus de Gualtar, Braga 4710, Portugal; e-mail: [email protected].
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Abstract

We show that dependence on foreign energy can increase economic instability by raising the likelihood of equilibrium indeterminacy, hence making it easier for fluctuations driven by self-fulfilling expectations to occur. This is demonstrated in a standard neoclassical growth model. Calibration exercises, based on the estimated share of imported energy in production for several countries, show that the degree of reliance on foreign energy for many countries can easily make an otherwise determinate and stable economy indeterminate and unstable.

Keywords

IndeterminacyEnergy ImportsExternalitiesReturns to ScaleSunspotsSelf-Fulfilling Expectations
Type
Notes
Information
Macroeconomic Dynamics , Volume 12 , Issue 5 , November 2008 , pp. 717 - 723
Copyright
Copyright © Cambridge University Press 2008

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References

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