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On the link between current account and oil price fluctuations in diversified economies: The case of Canada

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  • Gnimassoun, Blaise
  • Joëts, Marc
  • Razafindrabe, Tovonony

Abstract

This study revisits the important relationship between oil prices and current account for an oil-exporting-country with a diversified economy, namely Canada, by paying particular attention to the time-varying nature of this link. To this end, we rely on an innovative method, the time-varying parameter vector autoregressive (TVP-VAR) model with sign restriction. We find that while an oil supply shock has a non-significant impact on the current account, an oil demand shock has a positive and significant effect, which tends to increase over time. In addition, by studying the economic factors underlying the evolution of this relation, we show that the propensity to spend oil revenues on imports has a significant negative influence on the pass-through of oil demand shocks on current account. However, a deepening of the domestic financial market and an accumulation of foreign exchange reserves have a significant positive effect on this relationship.

Suggested Citation

  • Gnimassoun, Blaise & Joëts, Marc & Razafindrabe, Tovonony, 2017. "On the link between current account and oil price fluctuations in diversified economies: The case of Canada," International Economics, Elsevier, vol. 152(C), pages 63-78.
  • Handle: RePEc:eee:inteco:v:152:y:2017:i:c:p:63-78
    DOI: 10.1016/j.inteco.2017.07.001
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    Keywords

    Current account; Oil prices; Time-varying parameters;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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