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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 similar empirical study 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 price control policies 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 in capacity-utilization rate, is greater in the first 6 periods (namely half a year), 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 in the 7th period. Afterwards, the long-term impact dominates, and maintains for quite some time.

Suggested Citation

  • Tang, Weiqi & Wu, Libo & Zhang, ZhongXiang, 2010. "Oil price shocks and their short- and long-term effects on the Chinese economy," Energy Economics, Elsevier, vol. 32(Supplemen), pages 3-14, September.
  • Handle: RePEc:eee:eneeco:v:32:y:2010:i:supplement1:p:s3-s14
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    More about this item

    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;

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • P22 - Economic Systems - - Socialist Systems and Transition Economies - - - Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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