MACROECONOMIC IMPACTS OF ENERGY SHOCKS

The price and quantity shocks in oil markets seen in the past 2 decades have resulted in substantial transfers of real income among countries, and the effect on oil-producing nations has been enhanced by new discoveries of oil. The Energy Modelling Forum (EMF) research group has undertaken a major empirical study of the effects of energy price shocks on the US economy. A synthesis of the theoretical literature on the macroeconomics of energy shocks suggests a variety of ways in which sectoral effects might be important, noy only in themselves for also for the aggregate adjustment process following an energy shock. From the demand side, there is the link through the relative nontradables-tradables price to the real consumption wage; from the supply side come the relative price implications of relative oil intensities in production. The EMF modelers' approach to international linkages was to fix the exchange rate and use a separate Project LINK study to examine the effects of the oil shock on foreign prices and activity.