Tang, Weiqi and Wu, Libo and Zhang, ZhongXiang (2009): Oil price shocks and their short- and long-term effects on the Chinese economy.
Download (447Kb) | Preview
A considerable body of economic literature shows the adverse economic impacts of oil-price shocks for the developed economies. However, there has been a lack of empirical study of this kind on China and other developing countries. This paper attempts to fill this gap by answering how and to what extent oil-price shocks impact China’s economy, emphasizing on the price transmission mechanisms. To that end, we develop a structural vector auto-regressive model. Our results show that an oil-price increase negatively affects output and investment, but positively affects inflation rate and interest rate. However, with the differentiated price control policies for materials and intermediates on the one hand and final products on the other hand in China, the impact on real economy, represented by real output and real investment, lasts much longer than that to price/monetary variables. Our decomposition results also show that the short-term impact, namely output decrease induced by the cut of capacity-utilization rate, is greater in the first one to two years, but the portion of the long-term impact, defined as the impact realized through an investment change, increases steadily and exceeds that of short-term impact at the end of the second year. Afterwards, the long-term impact dominates, and maintains for quite some time.
|Item Type:||MPRA Paper|
|Original Title:||Oil price shocks and their short- and long-term effects on the Chinese economy|
|Keywords:||Structural vector auto-regressive model; Unit root test; Error-correction model; Oil-price shocks; Price transmission mechanisms; Investment; Output; Producer/consumer price index; Census X-12 approach; China|
|Subjects:||Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4 - Energy > Q41 - Demand and Supply
O - Economic Development, Technological Change, and Growth > O5 - Economywide Country Studies > O53 - Asia including Middle East
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4 - Energy > Q48 - Government Policy
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E22 - Capital; Investment; Capacity
O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O13 - Agriculture; Natural Resources; Energy; Environment; Other Primary Products
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E23 - Production
P - Economic Systems > P2 - Socialist Systems and Transitional Economies > P22 - Prices
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4 - Energy > Q43 - Energy and the Macroeconomy
|Depositing User:||ZhongXiang Zhang|
|Date Deposited:||17. Apr 2009 05:32|
|Last Modified:||11. Feb 2013 20:24|
Abel, A.B., Bernanke, B.S., 2001. Macroeconomics. Addison-Wesley Longman Inc.
Atkeson, A., Kehoe, P.J., 1999. Models of energy use: putty-putty vs. putty-clay. American Economic Review 89, 1028–1043.
Bacon, R.W., 1991. Rockets and feathers: the asymmetric speed of adjustment of U.K. retail gasoline prices to cost changes. Energy Economics 13, 211–218.
Balke, N.S., Fomby, T.B., 1997. Threshold cointegration. International Economic Review 38, 627–645.
Bernanke, B.S., Gertler, M., Watson, M., 1997. Systematic monetary policy and the effects of oil price shock. Brookings papers on Economic Activity 1, 91-142.
BP (2008), BP Statistical Review of World Energy, British Petroleum (BP), London.
Brown, S.P.A., Yu¨ cel, M.K., 1999. Oil prices and U.S. aggregate economic activity: A question of neutrality. Federal Reserve Bank of Dallas Economic and Financial Review, 16–53.
Brown, S.P.A., Yu¨ cel, M.K., 2002. Energy prices and aggregate economic activity: an interpretative survey. Quarterly Review of Economics and Finance 42, 193–208.
Bruno, M., Sachs, J., 1982. Input price shocks and the slowdown in economic growth: the case of UK manufacturing. Review of Economic Studies 51, 679-705
Burbidge, J., Harrison, A., 1984. Testing for the effects of oil-price rise using vector autoregressions. International Economic Review 25, 459–484.
Byung Rhae Lee, Kiseok Lee, Ronald A. Ratti, 2001. Monetary policy, oil price shocks, and the Japanese economy. Japan and the World Economy 13, 321-349.
Cologni, A.,Manera,M.,2008.Oil prices, inflation and interest rates in a structural cointegrated VAR model for the G-7 countries. Energy Economics 30 (3), 856-888.
Cunado, J., Perez de Gracia, F., 2003. Do oil price shocks matter? Evidence for some European Countries. Energy Economics 25 (2), 137–154.
Dohner, R.S., 1981. Energy prices, economic activity and inflation: survey of issues and results. In: Mork, K.A. (Ed.), Energy Prices, Inflation and Economic Activity. Ballinger, Cambridge, MA.
Findley, D. F., Monsell, B. C., Bell, W. R., Otto, M. C., and Chen, B. C., 1998. New Capabilities and Methods of the X-12-ARIMA Seasonal Adjustment Program. Journal of Business and Economic Statistics 16, 127--176.
Gisser, M., Goodwin, T.H., 1986. Crude oil and the macroeconomy: tests of some popular notions. Journal of Money, Credit and Banking 18, 95–103.
Hamilton, J.D., 1983. Oil and the macroeconomy since World War II. Journal of Political Economy 91, 228–248.
Hamilton, J.D., 1996. This is what happened to the oil price-macroeconomy relationship. Journal of Monetary Economics 38, 215–220.
Hamilton, J.D., Herrera, A.M., 2004. Oil shocks and aggregate macroeconomic behavior: the role of monetary policy. Journal of Money, Credit, and Banking 36, 265–286.
Hooker, M., 1996. What happened to the oil price-macroeconomy relationship? Journal of Monetary Economics 38, 195–213.
Huang, B.-N., Hwang, M.J., Peng, H.-P., 2005. The asymmetry of the impact of oil price shocks on economic activities: an application of the multivariate threshold model. Energy Economics 27, 455–476.
Kim. S., Kuijs, L., 2007. Raw material prices, wages and profitability in China’s industry — how was profitability maintained when input prices and wages increased so fast?. World Bank China Research Paper No. 8, Washington, DC.
Ladiray, D., Quenneville, B., 2001. Seasonal adjustment with the X-11 method. Springer-Verlag New York.
Lardic,S., Mignon.R. 2006. The impact of oil prices on GDP in European countries: An empirical investigation based on asymmetric cointegration, Energy Policy 34, 3910–3915.
Leduc, S., Sill, K., 2004. A quantitative analysis of oil price shocks, systematic monetary policy and economic downturns. Journal of Monetary Economics 51, 781–808.
Lee, B.R., Lee, K., Ratti, R.A., 2001. Monetary policy, oil price shocks, and the Japanese economy. Japan and the World Economy 13, 321–349.
Lee, K., Ni, S., 2002. On the dynamic effects of oil price shocks: a study using industry level data. Journal of Monetary Economics 49, 823–852.
Lee, K., Ni, S., Ratti, R.A., 1995. Oil shocks and the macroeconomy: the role of price volatility. Energy Journal 16, 39–56.
Lilien, D., 1982. Sectoral shifts and cyclical unemployment. Journal of Political Economy 90, 777–793.
Loungani, P., 1986. Oil price shocks and the dispersion hypothesis. Review of Economics and Statistics 58, 536–539.
Mackinnon, J. G., 1991. Critical values for cointegration tests. In: R.F. Engle and C.W. J. Granger (eds.), Long-run Economic Relationships: Readings in Cointegration. Oxford University Press.
Mork, K.A., 1989. Oil and the macroeconomy when prices go up and down: an extension of Hamilton’s results. Journal of Political Economy 97, 740–744.
Mork, K.A., 1994. Business cycles and the oil market. The Energy Journal 15, 15–38.
Mork, K.A., Olsen, O., Mysen, H.T., 1994. Macroeconomic responses to oil price increases and decreases in seven OECD countries. Energy Journal 15, 19–35.
Mory, J.F., 1993. Oil prices and economic activity: is the relationship symmetric?. The Energy Journal 14, 151–161.
Olsen, O., Mysen, H., 1994. Macroeconomic responses to oil price increases and decreases in seven OECD countries. Energy Journal 15, 19–35.
Pierce, J.L., Enzler, J.J., 1974. The effects of external inflationary shocks. Brookings Papers on Economic Activity 1, 13–61.
Shiskin, J., Young, A. H., and Musgrave, J. C., 1967. The X-11 variant of the Census method II seasonal adjustment program. Technical Paper 15, Bureau of the Census, U.S. Department of Commerce, Washington, DC.