The Effects of Energy Supply Shocks and Interest Rate Liberalization in China

Yihao Xue (), Qiayu Liang () and Bing Tong ()
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Yihao Xue: School of Economics at Henan University, Kaifeng, Henan
Qiayu Liang: School of Economics at Henan University, Kaifeng, Henan
Bing Tong: Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan

No 2022/1, CFDS Discussion Paper Series from Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China

Abstract: Based on a New Keynesian model with a transient interest rate peg and energy inputs in production, we examine the impact of China`s interest rate liberalization on the transmission of energy supply shocks. Theoretical analysis shows that in the face of negative supply shocks, output decreases less or even increases while inflation rises more under a fixed interest rate compared with a flexible interest rate. We construct the Divisia energy index based on Chinese data to test the model predictions. We identify energy supply shocks following the strategy of Kilian (2009) and obtain impulse responses using the local projection method proposed by Jordà (2005). The empirical results are consistent with our model predictions.

Keywords: Interest rate liberalization; Energy supply shocks; Divisia Index; New Keynesian model (search for similar items in EconPapers)
JEL-codes: E31 E42 E43 E52 E58 Q43 (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-cna, nep-dem, nep-dge, nep-ene and nep-mac
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