Working Paper BETA #2016-41

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Title : On the link between current account and oil price fluctuation in diversified economies: The case of Canada

Author(s) : Blaise Gnimassoun, Marc Joëts, Tovonony Razafindrabe

Abstract : This study revisits the important link between oil prices and current account for oil exporting countries by paying particular attention to the time-varying nature of this link. To this end, we rely on an innovative method, the time-varying parameter vector autoregressive (TVP-VAR) model with sign restriction. We find that while an oil supply shock has a non-significant impact on the current account, an oil demand shock has a positive and significant impact, which tends to increase over time. In addition, by studying the economic factors underlying the evolution of this relation, we find that although the propensity to spend oil revenues on imports has a significant negative influence on the pass-through of oil demand shocks on current account, a deepening of the domestic financial market and an accumulation of foreign exchange reserves have a significant positive effect.

Key-words : Curent account, Oil prices, Time-varying parameters.

JEL Classification : F32, Q43, C32.