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.
Published Version
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