| Summary/Abstract |
This paper evaluates the macroeconomic implications of energy price volatility through the lens of a dynamic stochastic general equilibrium (DSGE) model in an open economy. The model develops a small open economy in which households consume energy products and firms use energy as productivity inputs, where the country is so small that it needs to import energy, the price of which is determined abroad. Whereas positive energy price shocks cause an economic slowdown due to higher costs for consumers and firms, energy price volatility shocks generate an increase in GDP in the short-run and a reversal in the long-run. These findings are empirically supported by estimates from a Panel VAR model applied to 10 Asian economies, where energy price volatility has a positive impact on GDP in the short-run. Moreover, the paper finds that increasing demand or supply uncertainty also affect energy prices, with amplified fluctuations relative to a model that abstracts from energy. Market volatility leads households to cut consumption for precautionary savings motives, which in turn increases investment.
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