Imperfect Competition and the Effects of Energy Price Increases on Economic Activity

In spite of the voluminous empirical literature suggesting that oil price shocks have an important effect on economic activity, there is little consensus on the reason why this is so. A study presents a numerical estimate of the predicted effect of an increase in energy prices in a calibrated one-se...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 1996-11, Vol.28 (4), p.549-577
Main Authors: Rotemberg, Julio J., Woodford, Michael
Format: Article
Language:English
Subjects:
Analysis
Bank credit
Capital costs
Causes of
Collusion
Competition (Economics)
Economic activity
Economic fluctuations
Economic theory
Economics
Effects
Energy economics
Energy industries
Energy industry
Energy prices
Growth models
Imperfect competition
Influence
Markups
Modeling
Oil price
Oil price shocks
Oil prices
Petroleum
Power resources
Prices and rates
Real wages
Steady state economies
Studies
United States economic conditions
Value added
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Summary:In spite of the voluminous empirical literature suggesting that oil price shocks have an important effect on economic activity, there is little consensus on the reason why this is so. A study presents a numerical estimate of the predicted effect of an increase in energy prices in a calibrated one-sector stochastic growth model. It is shown that imperfectly competitive models, and in particular a model involving implicit collusion in the product market, can explain the estimated effect of oil price increases on output and real wages to a much greater extent than can a stochastic growth model that assumes a perfectly competitive product market.
ISSN:0022-2879
1538-4616
DOI:10.2307/2078071