OIL DEPENDENCE, INTERNATIONAL BORROWINGS, AND ECONOMIC INSTABILITY IN A SMALL OPEN ECONOMY

Abstract

The existing literature dealing with mutual interactions between the extent of oil dependence and the possibility of belief-driven fluctuations unanimously ignores international loans. This simplified assumption disregards the fact that the relative magnitude of the financial account and the trade account exhibits an increasing trend. Faced with this deficiency in the literature, this paper develops a real business cycle model featuring oil dependence in domestic production and international loans, and examines whether both the presence of international borrowings and the dependence on imported energy will govern the emergence of belief-driven fluctuations.