Van Wijnbergen, S. (1984). The optimal investment and current account response to oil price shocks under putty-clay technology Journal of International Economics, 17(1-2):139--147.
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Affiliated author
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Publication year1984
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JournalJournal of International Economics
The motivation for this paper is the discrepancy between actual CA responses to oil price shocks and the prediction derived from simple intertemporal optimizing models. These models indicate a decline in investment and a CA improvement as the optimal response. In this paper we introduce putty-clay technology into a two-period optimizing model and show that that leads to an increase in gross investments and a CA deterioration as an optimal response to large oil price shocks by net importers of oil. Successful adapters to the 1973/1974 oil price shocks (Korea, Taiwan) indeed followed such a policy.