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Liquidity and crude oil prices: China’s influence over 1996-2011

Movement in China’s money supply drives the movement in world money supply over the last twenty years. Within the framework advanced by Kilian (2009) that identifies the supply and demand side factors driving oil price changes we introduce the influence of liquidity in China and other countries on oil price changes. Structural shocks are large for both G3 (U.S., Eurozone and Japan) real M2 and China’s real M2. However, the cumulative impact of real G3 M2 shocks on real oil prices is small in contrast to a large cumulative effect of China’s real M2 on the real price of crude oil. It is shown that increased liquidity in China relative to that in the U.S., Eurozone and Japan significantly raises real oil prices over 1996:1-2011:12. Following a sharp fall in real oil price in the last half of 2008, the cumulative impact of China’s real M2 on the real price of crude oil is particularly substantial in the recovery of oil price during 2009 from a low of $41.68 for January 2009. The analysis sheds light on the causes of movement in oil prices over the last twenty five years and in assessing the relative importance of China in the upsurge of the real price of crude oil.

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Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 15062.

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Length: 25 pages
Date of creation: 20 Sep 2012
Date of revision: 20 Sep 2012
Publication status: Published by the University of Tasmania. Discussion paper 2012-05
Handle: RePEc:tas:wpaper:15062
Contact details of provider: Postal: Private Bag 85, Hobart, Tasmania 7001
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