Crude Oil Price and Aggregate Economic Activity: Asymmetric or Symmetric Relationship: Evidence from Canada's Economy

We represent an alternative time series technique to examine alternative asymmetry hypothesis based on the reliable vector Error Correction Model (ECM). We add up negative and/or positive and negative changes of crude oil prices in bivariate and multivariate ECM techniques among GDP, crude oil price, short-term interest rate, and aggregate implicit price deflator. This paper unlike the literature considers unit root and structural break tests for deciding whether co-integration and ECM techniques or VARs technique and innovation accounting tools would be used to explain the interaction of economic activities, oil price shocks, and other key economic variables. We apply this alternative method to Canada's economy using quarterly data over the period (1984- 2002). Our results suggest the long-term equilibrium relationship among GDP, the crude oil price, and other key economic variables. In contrast with the most literature, the results show that there is a significant portion of the symmetric and reversible response of Canada's economy to the crude oil price changes in both bivariate and multivariate context over the study period. We find that this symmetric response is due to the symmetric relationship of the crude oil price with the short-term interest rate and the aggregate price index in Canada's economy.