The Impact of Higher Oil Prices on the Global Economy - a Tale of Two Different Cases

Abstract

Most studies of the macroeconomic impact of higher oil prices do not distinguish two different cases of higher oil prices: the demand-driven versus supply-driven. As result, these studies, particularly those quantitative ones, would either underestimate the acuteness of a true supply-side oil shock or exaggerate the impact of higher oil prices driven mainly by increase global demand. This paper shows that the macroeconomic implications of these two cases are different: one is more an indication that the global economic growth is at or beyond the potential supported by global oil supply, while only the other could be defined as an oil shock.

Keywords: Oil shocks, model simulation, macroeconomic policy

JEL Classification: E32, C53