Essays on oil price fluctuations and macroeconomic activity

In this thesis, I am interested in the effects of fluctuations in oil prices on macroeconomic activity depending on the underlying cause of these fluctuations. The economic models used in this thesis include the Dynamic Stochastic General Equilibrium (DSGE) Models and Vector Autoregressive (VAR) Models.  Several studies have examined the effects of fluctuations in oil price on the main macroeconomic variables, but very few of theses studies have specifically made the link between the effects of fluctuations in oil prices and the origin of these fluctuations. However, it is widely accepted in more recent studies that oil price increases may have very different effects depending on the underlying cause of that increase. My thesis, structured in three chapters, is focused on the sources of fluctuations in oil price and their impacts on the macroeconomic activity in general, and in particular on the canadian economy.   The first chapter of the thesis investigates how oil supply shocks, aggregate demand shocks, and precautionary oil demand shocks affect Canada's economy, within an estimated Dynamic Stochastic General Equilibrium (DSGE) model. The estimation is conducted using Bayesian methods, with Canadian quarterly data from 1983Q1 to 2010Q4. The results suggest that the dynamic effects of oil price shocks on Canadian macroeconomic variables vary according to their sources. In particular, a 10% increase in the real price of oil driven by positive foreign aggregate demand shocks has a significant positive effect of about 0.4% on Canada's real GDP upon impact and the effect remains positive over time. In contrast, an increase in the real price of oil driven by negative foreign oil supply shocks  or by positive  precautionary oil demand shocks causes an insignificant effect on Canada's real GDP upon impact but causes a slightly significant decline afterwards. The intuition is that a positive innovation in aggregate demand tends to increase the demand for Canada's overall exports. Oil supply disruptions in foreign countries or positive precautionary oil demand shocks increase the uncertainty about future oil prices, which leads firms to postpone irreversible investment expenditures, and tends to reduce Canada's real GDP. Furthermore, among the identified oil shocks, foreign aggregate demand shocks have been relatively more important in explaining the variations of most of Canadian macroeconomic variables over the estimation period.  The second chapter examines the links between oil demand and supply shocks and labor market adjustments in Canadian manufacturing industries using a panel structural VAR model. The model is estimated with disaggregated annual data at the industry level from 1975 to 2008. The results show that a positive aggregate demand shock increases both labor and the price of labor over a 20-year period. A negative oil supply shock has a relatively small negative effect upon impact but the effect turns positive after the first year. In contrast, a positive precautionary oil demand shock has a negative impact over all horizons. The paper also examines how the responses to different types of oil shocks vary from industry to industry. The results suggest that industries with higher net trade exposure/oil-intensity are more vulnerable to oil price increases driven by oil supply shocks and aggregate demand shocks.  The third chapter examines the welfare implications of introducing competitive storage on the global oil market using a three country DSGE model characterized by two oil-importing countries and one oil-exporting country. The welfare gains are measured by consumption compensating variation under two alternative monetary policy rules. The main results indicate that the introduction of oil storage has negative welfare effects for each of the two oil importing countries, while it has positive welfare effects for the oil exporting country, whatever the monetary policy rule. I also found that including the exchange rate depreciation in the monetary policy rules allows to slightly reduce the welfare costs for both oil importing countries. Finally, the magnitude of the welfare effects depends on the steady state level of oil storage and is mainly driven by oil storage shocks.

Keyphrases: Canada, Bayesian estimation, DSGE models, Panel VAR models, Oil demand and supply shocks, Employment, Manufacturing industries, Open economy, Canada