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OIL DEPENDENCE, INTERNATIONAL BORROWINGS, AND ECONOMIC INSTABILITY IN A SMALL OPEN ECONOMY

Published online by Cambridge University Press:  08 August 2016

Ching-chong Lai ,
Chi-ting Chin  and
Kuan-jen Chen
Ching-chong Lai*
Affiliation:
Institute of Economics, Academia Sinica, National Cheng-Chi University, National Sun Yat-Sen University, and Feng Chia University
Chi-ting Chin
Affiliation:
Ming Chuan University
Kuan-jen Chen
Affiliation:
Fu-Jen Catholic University
*
Address correspondence to: Ching-chong Lai, Institute of Economics, Academia Sinica, Nankang, Taipei 115, Taiwan; e-mail: [email protected].
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Abstract

The existing literature dealing with mutual interactions between the extent of oil dependence and the possibility of belief-driven fluctuations unanimously ignores international loans. This simplified assumption disregards the fact that the relative magnitude of the financial account and the trade account exhibits an increasing trend. Faced with this deficiency in the literature, this paper develops a real business cycle model featuring oil dependence in domestic production and international loans, and examines whether both the presence of international borrowings and the dependence on imported energy will govern the emergence of belief-driven fluctuations.

Keywords

Oil DependenceEconomic InstabilitySmall Open Economy
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 4 , June 2017 , pp. 889 - 917
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

We are deeply grateful to two anonymous referees for their constructive comments, which substantially improved the paper. We are also indebted to Cheng-wei Chang and Chih-hsing Liao for their helpful suggestions and comments regarding earlier versions of the paper. Any remaining errors or shortcomings are, however, the authors' responsibility. Financial support from the National Science Council of Taiwan, under Grant NSC 101-2410-H-001-008-MY1, is gratefully acknowledged.

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