Oil price uncertainty, monetary policy and the macroeconomy: The Canadian perspective

• Published in: Economic modelling 2013-09, Vol.35, p.249-259
• Main Authors: Bashar, Omar H.M.N., Wadud, I.K.M. Mokhtarul, Ali Ahmed, Huson Joher
• Format: Article
• Language: English
• Subjects: Canada; Crude oil prices; Demand shock; Economic impact; Economic theory; Macroeconomics; Monetary Policy; Oil industry; Oil price; Oil price uncertainty; Output; Price levels; Structural VAR; Studies; Uncertainty
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2013.07.007

This paper revisits the link between oil price uncertainty and macroeconomy in the context of a net oil exporting country, Canada. Results obtained from alternative Structural VAR models suggest that while shocks to oil price level do not affect the aggregate level of output, the oil price uncertainty exerts considerable impacts on the Canadian economy. It is found that oil price uncertainty makes a major contribution to overall variations in the output level. Results also show that higher oil price uncertainty significantly decreases both output and price levels, resembling an adverse demand shock. Oil price uncertainty causes output to decline in most of the sub-sectors including durable and non-durable manufacturing. It is found that the Central Bank of Canada reacts with an expansionary monetary policy to oil price uncertainty shocks. •A shock to oil price uncertainty is found to have major contribution in the overall output variations.•We find that higher oil price uncertainty significantly reduces output and price levels resembling an adverse demand shock.•There have been mixed effects of oil price level shocks on the sectoral output levels.•The oil price uncertainty exerts negative impacts on the output levels of different sectors.•The Bank of Canada is found to react with its expansionary monetary policy to an oil price uncertainty shock.