Oil Price Shocks and Their Short- and Long-Term Effects on the Chinese Economy

Abstract

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.

Dynamic spillovers of oil price shocks and economic policy uncertainty

“…On one hand, higher oil prices exert negative impacts on the economy, such as lower productivity and/or higher inflation (see, inter alia, Filis and Chatziantoniou, 2013;Montoro, 2012;Natal, 2012;Rahman and Serletis, 2011;Balke et al, 2010;Elder and Serletis, 2010;Tang et al, 2010;Du et al, 2010;Filis, 2010;Cologni and Manera, 2008;Cunado and Pérez de Gracia, 2005;Peter Ferderer, 1997;Hamilton, 1983). Such economic conditions put pressure on policy makers to mitigate the negative effects of increased oil prices, which in turn, raises concerns regarding the success of these policies.…”

“…Since the seminal paper by Hamilton (1983), mounting empirical evidence indicates that oil prices exercise a strong negative influence on the economy. More specifically, past evidence suggest that there are significant effects of oil prices on industrial production and inflation (see, inter alia, Filis and Chatziantoniou, 2013;Balke et al, 2010;Tang et al, 2010;Du et al, 2010;Filis, 2010;Peter Ferderer, 1997). Furthermore, authors such as, Rahman and Serletis (2011), Elder and Serletis (2010), Cologni and Manera (2008), Cunado and Pérez de Gracia (2005), Lee et al (1995) and Hamilton (1983) confirm that the US economic activity has been significantly affected by rises in oil prices, as well as, by the uncertainty about future oil price changes.…”

Dynamics of electricity consumption, oil price and economic growth: Global perspective

“…They applied a structural vector autoregression model (SVAR) and confirmed that oil price leadsto a current account deficit that leads to a decline in economic growth. In the case of China, Tang et al (2010) reported that oil price shocks adversely affect economic growth and investment.…”

“…Oil prices hike affect real economic activity via supply and demand channels and vice versa. The supply-side channel reveals that oil is a basic factor for production, and an increase in oil price lead to increase in the cost of production, which leads firms or industries to lower output (Morey 1993, Tang et al 2010. The demand-side channel entails that oil price shocks affect not only consumption but also investment activities.…”

“…Increase in oil prices will lower output, which lowers real wages due to the decline in demand for labor as a result of the decline in economic growth. A decline in economic growth is positively linked with less disposable income and consumption as well (Maeda 2008, Tang et al 2010, Ftiti et al 2016). …”