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

  • Libo Wu

    (Center for Energy Economics ans Strategy Studies, Fudan University)

  • Jing Li

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

  • ZhongXiang Zhang

    ()

    (East-West Center)

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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Paper provided by East-West Center, Economics Study Area in its series Economics Study Area Working Papers with number 115.

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Length: pages 41
Date of creation: Mar 2011
Date of revision:
Handle: RePEc:ewc:wpaper:wp115
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