^*Selim Elekdag is an economist with the IMF Research Department; René Lalonde is a model adviser with the Bank of Canada's International Department; Douglas Laxton is an assistant to the director of the IMF's Research Department; Dirk Muir is a principal researcher with the Bank of Canada's International Department; and Paolo Pesenti is an assistant vice-president from the Federal Reserve Bank of New York, and an associate of the CEPR and NBER. The authors thank Ryan Felushko, Laura Leon, Lei Lei Myaing, Susanna Mursula, and Chris Tonetti for invaluable research assistance. This paper has benefited from helpful comments from Riccardo Cristadoro of the Banca d'Italia and participants of the Bank of Canada Workshop on Commodity Price Issues, the IMF Workshop on Open Economy Models for Policy Evaluation and presentations at the Bank of Japan, the Hong Kong Monetary Authority, and the European Central Bank.

Abstract

This paper develops a five-region version—Canada, a group of oil-exporting countries, the United States, emerging Asia, and Japan plus the euro area—of the global economy model encompassing production and trade of crude oil. In the presence of real adjustment costs that reduce the short- and medium-term responses of oil supply and demand, our simulations can account for large endogenous variations of oil prices with large effects on the terms of trade of oil-exporting versus oil-importing countries, and result in significant wealth transfers between regions. This is especially true when we consider a sustained increase in productivity growth or a shift in production technology toward more oil-intensive goods in regions such as emerging Asia. In addition, we study the implications of higher taxes on gasoline, showing that such a policy could increase world productive capacity while being consistent with a reduction in oil consumption.