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The Effects Of Energy Supply Shocks And Interest Rate Liberalization In China

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  • YIHAO XUE

    (School of Economics, Henan University, Ming Lun Street, Kaifeng, Henan, P. R. China)

  • QIAOYU LIANG

    (School of Economics, Henan University, Ming Lun Street, Kaifeng, Henan, P. R. China)

  • BING TONG

    (��CFDS, Institute of Finance and Securities, School of Economics, Henan University, Ming Lun Street, Kaifeng, Henan, P. R. China)

Abstract

Based on a New Keynesian model with a transient interest rate peg and energy inputs in production, we examine the impact of China’s interest rate liberalization on the transmission of energy supply shocks. Theoretical analysis shows that in the face of negative supply shocks, output decreases less or even increases while inflation rises more under a fixed interest rate compared with a flexible interest rate. We construct the Divisia energy index based on Chinese data to test the model predictions. We identify energy supply shocks following the strategy of Kilian (2009) and obtain impulse responses using the local projection (LP) method proposed by Jordà (2005). The empirical results are generally consistent with our model predictions.

Suggested Citation

  • Yihao Xue & Qiaoyu Liang & Bing Tong, 2025. "The Effects Of Energy Supply Shocks And Interest Rate Liberalization In China," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 70(06), pages 1529-1563, September.
    • Handle: RePEc:wsi:serxxx:v:70:y:2025:i:06:n:s0217590823500224
    DOI: 10.1142/S0217590823500224
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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