Trade shoks and aggregate fluctuations in an oil-exporting economy

Abstract

In this paper we analyze the role of trade shocks in shaping aggregate fluctuations in Venezuela from 1950 to 1995. To this end a stochastic general equilibrium model of a small open economy whose main productive activity rests in the exports of a single basic product is specied. Shocks to the terms of trade which are directly associated to oil price changes are modelled as a foreign transfer. We find that this approach gives predictions that are consistent with the time series properties of Venezuela when i) the income effect of consumption more than compensates the substitution effect that generates the oil transfer and, ii) there is imperfect capital mobility. In particular, our model specification captures the observed patterns of the main aggregates after the oil resource boom of 1974.