Gauging the Impact of Higher Capital and Oil Costs on Potential Output

The 2007-2009 period has been characterised by an oil shock followed by a financial crisis. Higher oilprices and the prospect of higher borrowing costs are likely to reduce the productive potential of OECDeconomies. The present study provides illustrative numerical estimates of the impact under differentscenarios using a stylised model based on a production function. In a scenario where real borrowing costsfor firms return to their 1991-2001 average as opposed to staying at the level at which the capital stock inplace at the end of 2007 had been invested, the impact on equilibrium GDP could be in the order of 2%. Ifthe real oil price stays at $80 per barrel, up from the $50 average at which the capital stock in place in 2007had been invested, the impact on equilibrium GDP could be in the order of 1%.