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Inflationary Effect of Oil-Price Shocks in an Imperfect Market: A Partial Transmission Input-output Analysis

Author

Listed:
  • Libo Wu

    (Center for Energy Economics and Strategy Studies, Fudan University and Institute of World Economy, Fudan University)

  • Jing Li

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

  • ZhongXiang Zhang

    (East-West Center)

Abstract

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.

Suggested Citation

  • Libo Wu & Jing Li & ZhongXiang Zhang, 2011. "Inflationary Effect of Oil-Price Shocks in an Imperfect Market: A Partial Transmission Input-output Analysis," Working Papers 2011.29, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2011.29
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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," Koç University-TUSIAD Economic Research Forum Working Papers 1504, Koc University-TUSIAD Economic Research Forum.
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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.
    7. Damira Keček, 2023. "The Effects of Rising Energy Prices on Inflation in Croatia," Energies, MDPI, vol. 16(4), pages 1-14, February.
    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.
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    More about this item

    Keywords

    Oil-price Shocks; Price Transmission; Price Control; Input-output Analysis; Inflation; Industrial Structure; China; the United States;
    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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