Oil price shocks and China's economy: Reactions of the monetary policy to oil price shocks |
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| Affiliation: | 1. Department of Economics, Konkuk University, Seoul, Republic of Korea;2. Lebow College of Business, Drexel University, Philadelphia, United States;3. Department of Economics, University of Pretoria, Pretoria, South Africa;4. Energy and Sustainable Development (ESD), Montpellier Business School, Montpellier, France;1. Department of Economics, East West University, Plot No-A/2, Aftabnagar Main Road, Dhaka 1219, Bangladesh;2. Department of Economics, University of Otago, P.O. Box 56, Dunedin 9054, New Zealand;3. Schulich School of Business, York University, 4700 Keele Street, Toronto, ON M3J 1P3, Canada;1. School of Business, Clarkson University, 8 Clarkson Avenue, Potsdam, NY 13699, United States;2. Clarkson University, Potsdam, NY 13699, United States;3. Department of Economics, Rochester Institute of Technology, 1 Lomb Memorial Dr, Rochester, NY 14623, United States;1. Center for Energy and Environmental Policy Research, Institute of Policy and Management, Chinese Academy of Sciences, Beijing, China;2. Department of International Business and Center for Applied Economic Modeling, Chung Yuan Christian University, Taiwan;1. Leeds Beckett University, United Kingdom of Great Britain and Northern Ireland;2. Montpellier Business School, France;1. Institute for Advanced Research, Shanghai University of Finance and Economics, Shanghai 200433, China;2. Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing 100190, China |
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| Abstract: | The paper empirically analyzes the effect of positive oil price shocks on China's economy, having special interest in the response of the Chinese interest rate to those shocks. Using different econometric models, i) a time-varying parameter structural vector autoregression (TVP SVAR) model with short-run identifying restrictions, ii) a structural VAR (SVAR) model with the short-run identifying restrictions, and iii) a VAR model with ordering-free generalized impulse response VAR (GIR VAR), we find that the response of the Chinese interest rate to the oil price shocks is not only time-varying but also showing quite different signs of responses. Specifically, in the earlier sample period (1992:4–2001:10), the interest rate shows a negative response to the oil price shock, while in the latter period (2001:11–2014:5) it shows a positive response to the shock. Given the negative response of the world oil production to an oil price shock in the earlier period, the shock is identified as a negative supply shock or a precautionary demand shock as suggested by Kilian (2009), thereby the negative response of the interest rate to the oil price shock is deemed as economy-boosting. The positive response of the interest rate to the oil price shock in the later period, given that this shock is identified as a positive world oil demand shock, gives evidence that stabilization of inflation is one of the main objectives of China's monetary authority, even though the current main objective of the monetary policy is characterized as “maintaining the stability of the value of the currency and thereby promoting economic growth.” Finally, the variance decomposition results reveal that the oil price shock becomes an increasingly important source in the volatility of China's interest rate. |
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