Open Economies Review

, 22:365 | Cite as

The Impact of Energy Prices on Growth and Welfare in a Developing Open Economy

Research Article


This paper analyzes the impact of an increase in the price of energy (oil) on the growth and welfare of a small developing economy. We consider the extent to which the impacts of energy price shocks depend upon the economy’s internal production structure and its access to the world financial market. We find that the effect on the long-run growth rate depends heavily on the former and is independent of the latter. The effect of accessibility to the world financial market on long-run welfare depends heavily on the elasticity of substitution in production. We supplement the formal analysis with numerical simulations, thereby enabling us to characterize the short-run dynamics. Overall, the simulations can replicate much of the empirical evidence used to characterize the effects of the recent oil price increases on the economy. They also highlight the sensitivity of the effect of the energy price to the elasticity of substitution.


Energy prices Growth Welfare Developing economy 

JEL Classification

D31 F41 O41 


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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Free University of Bozen-BolzanoBolzanoItaly
  2. 2.Department of EconomicsUniversity of WashingtonSeattleUSA

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