Nber Working Paper Series Energy and Growth under Flexible Exchange Rates: a Simulation Study

This paper offers a theoretical framework for studying the interactions of energy prices and economic growth. The incorporation of energy prices and quantities in a macroeconomic setting focuses on (1) the aggregate technology; (2) the interdependence of energy producers and consumers in the world economy; and (3) the asset markets as the channel through which energy price changes affect output and capital accumulation. While several existing studies consider aspects of these issues, none provides a synthesis. In this analysis, a theoretically sound model of an oil price increase in the world economy is presented, carefully treating topics (1) — (3). The model is solved with computer simulation, as it is far too complex to yield analytical solutions. Jeffrey Sachs National Bureau of Economic Research 1050 Massachusetts Avenue Cambridge, Massachusetts 02138