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Inflationary Effect of Oil-Price Shocks in an Imperfect Market: A Partial Transmission Input-output Analysis

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  • Libo Wu

    (Center for Energy Economics and Strategy Studies, Fudan University and Institute of World Economy, Fudan University)

  • Jing Li

    (Department of World Economy, School of Economics, Fudan University)

  • ZhongXiang Zhang

    (East-West Center)

Abstract

This paper aims to examine the impacts of oil-price shocks on China’s price levels. To that end, we develop a partial transmission input-output model that captures the uniqueness of the Chinese market. We hypothesize and simulate price control, market factors and technology substitution - the three main factors that restrict the functioning of a price pass-through mechanism during oil-price shocks. Using the models of both China and the U.S., we separate the impact of price control from those of other factors leading to China’s price stickiness under oil-price shocks. The results show a sharp contrast between China and the U.S., with price control in China significantly preventing oil-price shocks from spreading into its domestic inflation, especially in the short term. However, in order to strengthen the economy’s resilience to oil-price shocks, the paper suggests a gradual relaxing of price control in China.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2011.29.

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Date of creation: Mar 2011
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Handle: RePEc:fem:femwpa:2011.29

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Keywords: Oil-price Shocks; Price Transmission; Price Control; Input-output Analysis; Inflation; Industrial Structure; China; the United States;

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