Carbone & McKenzie: Going Dutch? The Impact of Oil Price Shocks on the Canadian Economy

Abstract:

We examine the steady-state impact of a 10 percent reduction in the price of oil using a CGE model of the Canadian economy. The model includes a high degree of disaggregation at both the sectoral and provincial level, international and interprovincial flows of goods and services, labour which is mobile between sectors, capital which is partly mobile both inter-provincially and inter-sectorally, and equilibrium exchange rate adjustments arising from the oil price shock. The key result of our simulations is that — on balance — a negative oil price shock leaves Canadians worse off. We also find that the welfare losses associated with a negative oil price shock are shared broadly across the provinces. The corollary, of course, is that a positive price shock leaves Canadians better off. Our results have implications for the presence (or significance) of Dutch Disease in Canada; we argue that the “disease” is just one of a number of effects generated by oil-price changes.

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