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Inflationary effect of oil-price shocks in an imperfect market: A partial transmission input–output analysis

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  • Wu, Libo
  • Li, Jing
  • Zhang, ZhongXiang

Abstract

This paper aims to examine the impacts of sectoral price control policies on oil price pass-through into China's aggregate price level. 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 US, we separate the impact of price control from that of other factors leading to China's price stickiness under oil-price shocks. The results show a sharp contrast between China and the US, 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.

Suggested Citation

  • 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, vol. 35(2), pages 354-369.
    • Handle: RePEc:eee:jpolmo:v:35:y:2013:i:2:p:354-369
    DOI: 10.1016/j.jpolmod.2012.01.008
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    4. John Baffes & M. Ayhan Kose & Franziska Ohnsorge & Marc Stocker, 2015. "The great plunge in oil prices: causes, consequences, and policy responses," CAMA Working Papers 2015-23, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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    6. Többen, Johannes, 2017. "Regional Net Impacts and Social Distribution Effects of Promoting Renewable Energies in Germany," Ecological Economics, Elsevier, vol. 135(C), pages 195-208.
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    8. Michał Przybyliński & Artur Gorzałczyński, 2022. "Applying the input–output price model to identify inflation processes," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 11(1), pages 1-11, December.
    9. Claudiu Tiberiu Albulescu & Cornel Oros & Aviral Kumar Tiwari, 2017. "Oil price–inflation pass-through in Romania during the inflation targeting regime," Applied Economics, Taylor & Francis Journals, vol. 49(15), pages 1527-1542, March.
    10. Huang, Xuan & Liu, Xueyong, 2022. "The time-frequency evolution of multidimensional relations between global oil prices and China's general price level," Energy, Elsevier, vol. 244(PA).
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    More about this item

    Keywords

    Oil-price shocks; Price pass-through; Price control; Input–output analysis; Inflation; China;
    All these keywords.

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • P22 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Prices
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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