Anticipated and Unanticipated Oil Price Increases and the Current Account

Abstract

This paper examines the current-account response to anticipated future increases in real oil prices as well as to unexpected increases which may be temporary or permanent in nature. The analysis is conducted using an intertemporal two-period model of a small open economy which produces both traded and nontraded goods and imports its oil. The paper identifies the channels through which various types of oil price increases affect the current account. The inclusion of nontraded investment and consumer goods permits oil price increases to generate intertemporal and static substitution effects in production and consumption which alter net international saving. Moreover, the relative oil-value-added ratio in the traded and nontraded sectors plays a crucial role in shaping these substitution effects and hence the current-account response.