Abstract
We examine the dynamic effects of an oil price shock on a small open economy that imports oil and exports labor to the oil exporting countries. We find that the reduction in output resulting from the oil price shock is at least partially mitigated by an accompanying increase in remittances from the expatriated labor. We also show that with a jump in oil price, domestic labor use decreases and labor export increases, oil consumption falls, and steady-state capital and consumption fall. However, consumption may intially jump up depending on the relative sizes of the negative supply effect and the positive remittance effect. Although consumption will eventually fall below the pre-shock level as steady state is approached, the initial consumption increase may be sufficiently large and long lasting to make the shock scenario welfare improving.