The Impact on the United States of the Rise in Energy Prices: Does the Source of the Energy Market Imbalance Matter?

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Abstract: This paper uses a variant of the IMF’s Global Economy Model (GEM) to illustrate how the macroeconomic impact on the United States of the rise in energy prices since the end of 2003 may vary depending on the source of the energy market imbalance. If oil market supply-side factors are driving prices higher, GDP will be permanently lower than it otherwise would be. However, if higher energy prices reflect primarily increased demand due to rising labor supply or tradable sector productivity growth in emerging Asian economies, for example, then GDP in the United States could actually rise in the long run. This occurs because the United States receives some positive terms-of-trade effects coming through nonenergy tradable goods prices that offset the negative implications for GDP of permanently higher energy prices. [JEL E3, E52]