Abstract
The evidence from the first chapter suggest that when compared over two period pre 1990s and post 1990s the effect of oil prices on developing country’s macro economy has changed a lot. While pre 1990 saw larger impact on prices post 1990s experienced effects on real variables. In order to shed light on the possible factors behind the change in the macroeconomic effects of oil price shocks, I developed a new-Keynesian model, with imported oil used both in production and consumption. Five different hypotheses for these effects were tested (a) smaller share of oil in production, (b) more flexible labour markets, (c) improvements in monetary policy, (d) Technology Catch-up (e)Government Intervention. Conclusion was that all the five played an important role.
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