READING THE EFFECTS OF AN ENERGY SHOCK IN FINANCIAL-MARKETS

The impact of an oil price increase on goods output depends, in part, on the response of financial markets. This article adds three distinct effects of energy prices to a Keynesian model peopled with forward-looking investors choosing among a menu of assets. Combining Blanchard's (1981) long-term-asset dynamics with Mussa's (1981) explanation of goods-price stickiness arrives at a perfect foresight adjustment path that can be projected on the traditional IS-LM framework. © 1991.