Oil Dependence, International Borrowings, and Economic Instability in a Small Open Economy

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.

A Note on Optimal Capital Taxation With Preference Externalities

“…9. Notice that quarterly data are used in Kydland and Prescott (1991), Aguiar-Conraria and Wen (2008), and Lai et al (2017).…”

“…Following Karnizova (2010) and Finkelstein Shapiro and Mandelman (2016), the capital share is set to α = 0.32. The rate of time preference is set to ρ = 0.04, as used by Kydland and Prescott (1991), Aguiar-Conraria and Wen 2008, and Lai et al (2017). 9 The annual depreciation rate is set to δ = 0.1, as used by Aguiar-Conraria and Wen 2008, Karnizova (2010), and Finkelstein Shapiro and Mandelman (2016).…”

Optimal fiscal policy under monopolistic competition with firm heterogeneity

“…The benchmark value of the degree of firm heterogeneity is set to 4.25, which is taken from Melitz and Redding (2015). In line with Aguiar‐Conraria and Wen (2012) and Lai et al (2017), the inverse labor supply elasticity is set to 0. Based on Cadot et al (2006) and Roulleau‐Pasdeloup (2013), the extent of productive government spending is set to .…”