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Oil price shocks and their short- and long-term effects on the Chinese economy

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  • Tang, Weiqi
  • Wu, Libo
  • Zhang, ZhongXiang

Abstract

A considerable body of economic literature shows the adverse economic impacts of oil-price shocks for the developed economies. However, there has been a lack of empirical study of this kind on China and other developing countries. This paper attempts to fill this gap by answering how and to what extent oil-price shocks impact China’s economy, emphasizing on the price transmission mechanisms. To that end, we develop a structural vector auto-regressive model. Our results show that an oil-price increase negatively affects output and investment, but positively affects inflation rate and interest rate. However, with the differentiated price control policies for materials and intermediates on the one hand and final products on the other hand in China, the impact on real economy, represented by real output and real investment, lasts much longer than that to price/monetary variables. Our decomposition results also show that the short-term impact, namely output decrease induced by the cut of capacity-utilization rate, is greater in the first one to two years, but the portion of the long-term impact, defined as the impact realized through an investment change, increases steadily and exceeds that of short-term impact at the end of the second year. Afterwards, the long-term impact dominates, and maintains for quite some time.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14703.

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Date of creation: Mar 2009
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Handle: RePEc:pra:mprapa:14703

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Keywords: Structural vector auto-regressive model; Unit root test; Error-correction model; Oil-price shocks; Price transmission mechanisms; Investment; Output; Producer/consumer price index; Census X-12 approach; China;

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Cited by:
  1. Dogrul, H. Günsel & Soytas, Ugur, 2010. "Relationship between oil prices, interest rate, and unemployment: Evidence from an emerging market," Energy Economics, Elsevier, Elsevier, vol. 32(6), pages 1523-1528, November.
  2. Alfredo Pereira & Rui Pereira, 2013. "Fossil fuel prices and the economic and budgetary challenges of a small energy-importing economy: the case of Portugal," Portuguese Economic Journal, Springer, Springer, vol. 12(3), pages 181-214, December.
  3. Jean-Pierre Allegret & Cécile Couharde & Cyriac Guillaumin, 2012. "The impact of external shocks in East Asia : lessons from a structural VAR model with block exogeneity," Post-Print, HAL halshs-00697310, HAL.
  4. Wensheng Kang & Ronald A. Ratti, 2014. "Policy Uncertainty in China, Oil Shocks and Stock Returns," CAMA Working Papers 2014-32, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. Yýlmaz BAYAR & Cuneyt KILIC, 2014. "Effects of Oil and Natural Gas Prices on Industrial Production in the Eurozone Member Countries," International Journal of Energy Economics and Policy, Econjournals, Econjournals, vol. 4(2), pages 238-247.
  6. Chai, Jian & Guo, Ju-E. & Meng, Lei & Wang, Shou-Yang, 2011. "Exploring the core factors and its dynamic effects on oil price: An application on path analysis and BVAR-TVP model," Energy Policy, Elsevier, Elsevier, vol. 39(12), pages 8022-8036.
  7. Rafik Nazarian & Ashkan Amiri, 2014. "Asymmetry of the Oil Price Pass–Through to Inflation in Iran," International Journal of Energy Economics and Policy, Econjournals, Econjournals, vol. 4(3), pages 457-464.
  8. Solaymani, Saeed & Kari, Fatimah, 2014. "Impacts of energy subsidy reform on the Malaysian economy and transportation sector," Energy Policy, Elsevier, Elsevier, vol. 70(C), pages 115-125.
  9. Wu, Libo & Li, Jing & Zhang, ZhongXiang, 2013. "Inflationary effect of oil-price shocks in an imperfect market: A partial transmission input–output analysis," Journal of Policy Modeling, Elsevier, Elsevier, vol. 35(2), pages 354-369.
  10. Feldkircher, Martin & Korhonen, Iikka, 2012. "The rise of China and its implications for emerging markets - Evidence from a GVAR model," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 20/2012, Bank of Finland, Institute for Economies in Transition.
  11. Al-mulali, Usama & Che Sab, Normee, 2009. "The Impact of Oil Prices on the Real Exchange Rate of the Dirham: a Case Study of the United Arab Emirates," MPRA Paper 23493, University Library of Munich, Germany.
  12. Alom, Fardous, 2011. "Economic Effects of Oil and Food Price Shocks in Asia and Pacific Countries: An Application of SVAR Model," 2011 Conference, August 25-26, 2011, Nelson, New Zealand, New Zealand Agricultural and Resource Economics Society 115346, New Zealand Agricultural and Resource Economics Society.
  13. Huang, Wen-Hsiu & Chao, Ming-Che, 2012. "The effects of oil prices on the price indices in Taiwan: International or domestic oil prices matter?," Energy Policy, Elsevier, Elsevier, vol. 45(C), pages 730-738.
  14. Al-mulali, Usama & Che Sab, Che Normee, 2010. "The Impact of Oil Shocks on Qatar’s GDP," MPRA Paper 27822, University Library of Munich, Germany, revised 31 Dec 2010.
  15. Nikolaos Antonakakis & Ioannis Chatziantoniou & George Filis, 2014. "Dynamic Spillovers of Oil Price Shocks and Policy Uncertainty," Department of Economics Working Papers, Vienna University of Economics, Department of Economics wuwp166, Vienna University of Economics, Department of Economics.
  16. George Filis & Ioannis Chatziantoniou, 2014. "Financial and monetary policy responses to oil price shocks: evidence from oil-importing and oil-exporting countries," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 42(4), pages 709-729, May.
  17. Akoum, Ibrahim & Graham, Michael & Kivihaho, Jarno & Nikkinen, Jussi & Omran, Mohammed, 2012. "Co-movement of oil and stock prices in the GCC region: A wavelet analysis," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 52(4), pages 385-394.
  18. Degiannakis, Stavros & Filis, George & Floros, Christos, 2013. "Oil and stock returns: Evidence from European industrial sector indices in a time-varying environment," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 26(C), pages 175-191.
  19. Xia, X.H. & Huang, G.T. & Chen, G.Q. & Zhang, Bo & Chen, Z.M. & Yang, Q., 2011. "Energy security, efficiency and carbon emission of Chinese industry," Energy Policy, Elsevier, Elsevier, vol. 39(6), pages 3520-3528, June.

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