DP65 Oil Price Shocks, Unemployment, Investment and the Current Account: An Intertemporal Disequilibrium Analysis

Author(s): Sweder van Wijnbergen
Publication Date: June 1985
Keyword(s): Classical Unemployment, Disequilibrium, Factor Price Changes, Keynesian Unemployment, Stabilization Policy
JEL(s): 023, 131, 431
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=65

We use an intertemporal model incorporating short-run labour and goods markets disequilibrium to analyse the consequences of oil price shocks for unemployment, investment and the current account. A dominant transfer element leads to Keynesian unemployment now and deterioration tomorrow in the final-goods terms of trade. A dominant supply-shock element leads to classical unemployment now and an improvement tomorrow in the final-goods terms of trade. Investment falls if there is classical unemployment but increases in the K-region under Putty-Clay technology. Current account deficits are larger in the K-region than in the C-region. If world interest rates fall, investment accelerates in the K-region but not in the C-region. We use these results to explain observed differences in response to oil shocks.