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The Effects of Energy Supply Shocks and Interest Rate Liberalization in China

Author

Listed:
  • Yihao Xue

    (School of Economics at Henan University, Kaifeng, Henan)

  • Qiaoyu Liang

    (School of Economics at Henan University, Kaifeng, Henan)

  • Bing Tong

    (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)

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 method proposed by Jordà (2005). The empirical results are consistent with our model predictions.

Suggested Citation

  • Yihao Xue & Qiaoyu Liang & Bing Tong, 2022. "The Effects of Energy Supply Shocks and Interest Rate Liberalization in China," CFDS Discussion Paper Series 2022/1, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
    • Handle: RePEc:fds:dpaper:202201
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    References listed on IDEAS

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    More about this item

    Keywords

    Interest rate liberalization; Energy supply shocks; Divisia Index; New Keynesian model;
    All these keywords.

    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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