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Wells or Welfare? Macroeconomic implications of the Canadian oil subsidy

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  • Zoundi, Zakaria

Abstract

The study constructs a general equilibrium model to investigate the macroeconomic effects of oil production and investment subsidies. To make the model reflect real-life situations, the study incorporates Canadian economic data and uses a Bayesian method to fine-tune the model. Although subsidies boost the short-term economic effects of oil price shocks, they lead to overall losses in economic welfare over time, regardless of the channel through which they are provided. The study shows that a less aggressive headline inflation-targeting monetary policy combined with an efficient tax system is more beneficial in terms of welfare maximisation. The findings suggest three essential and complementary policies: a gradual phase-out of oil subsidies, starting with investment subsidies due to their relatively high welfare cost; increased investment in the green energy sector to reduce carbon footprints and offset the decline in oil and gas sectors; and improved coordination between fiscal and monetary policies.

Suggested Citation

  • Zoundi, Zakaria, 2024. "Wells or Welfare? Macroeconomic implications of the Canadian oil subsidy," Economic Modelling, Elsevier, vol. 139(C).
    • Handle: RePEc:eee:ecmode:v:139:y:2024:i:c:s0264999324001500
    DOI: 10.1016/j.econmod.2024.106794
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    More about this item

    Keywords

    Fiscal policy; Monetary policy; Oil shock; Welfare;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F68 - International Economics - - Economic Impacts of Globalization - - - Policy
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium

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