The effects of oil price shocks in a federation; The case of interregional trade and labour migration

Abstract

Oil price shocks generate heterogeneous effects across and within countries. The primary effects of the shocks are on the supply side of the economy in oil-importing countries and on the demand-side in oil-exporting countries. However, in addition to these direct effects, which are widely studied in the literature, the oil price shocks also generate spillover effects through trade and labour migration. The multi-country studies often do not consider the heterogeneities and spillover effects and cannot fully capture the differences in institutions and political structures across countries. In this study, we investigate the heterogeneous effects of oil price shocks on the Canadian economy, which includes autonomous oil-exporting and oil-importing provinces in a federal system under the same institutions, monetary policy, and political structure. Furthermore, trade and labour migration take place across provinces without significant barriers observed in international relations. We set up a panel VAR model to estimate the dynamic responses of provinces to oil price shocks accounting for the provincial heterogeneities and the spillover effects. We also test for asymmetric effects of positive and negative oil price shocks on provinces and examine the differences in the pre- and post-2000 periods. The results indicate that the oil price shocks generate positive impacts on both oil-exporting and oil-importing provinces, which is in contrast to the results often reported for individual countries or regions. The effects are asymmetric for positive and negative oil price shocks and more pronounced in the post-2000 period.