Energy Price Shocks and Financial Market Integration: Evidence from New Keynesian Model

The purpose of this study is to examine the impact of oil price shocks on economic activity. A dynamic stochastic general equilibrium model was applied to verify the role of international financial integration in a New Keynesian model when the oil price shocks hit the economic system. The key findings show that more financial integration tends to dampen the effect of an increase in the oil price than less financial integration. The sensitivity analysis shows that increased elasticity of substitution between oil and domestic goods allows importing countries to reduce their dependence on oil. Financial integration plays an important role in reducing the oil shock effect.