Intra-federal effects of oil prices: Evidence from Canada

Abstract

Substantial endowments of extractive resources often pave the way to resource dependence for countries, making them vulnerable to price shocks and stymying economic growth. However, resource-endowed regions within countries may be immune to the adverse effects of resource booms. In fact, resource endowments may even prove to be blessings for such regions. Using Bayesian Structural Vector Autoregression, we examine these possibilities by studying the intra-federal effects of oil price shocks on ten Canadian provinces' outputs and labour markets. We show that the manufacturing sectors of Alberta and Saskatchewan, two resource-rich provinces, expand (contract) during oil booms (busts); also, their responses are persistent. The services sectors of these provinces also expand, albeit to a lesser extent. Contrastingly, in Newfoundland and Labrador, another resource-rich province, resource booms do not affect the manufacturing sector. In general, the provincial services sectors are insensitive to oil price shocks. Considering the characteristic volatility of oil markets and the services sectors' insensitivity to oil price shocks, curating a diversified services-centric economy that is not tethered to the oil and gas industry would serve these provinces well.