The effects of oil price shocks on output and inflation in China

Lin Zhao, Xun Zhang, Shouyang Wang and Shanying Xu

Energy Economics, 2016, vol. 53, issue C, 101-110

Abstract: Crude oil price shocks derive from many sources, each of which may bring about different effects on macro-economy variables and require completely different designs in macro-economic policy; thus, distinguishing the sources of oil price fluctuations is crucial when evaluating these effects. This paper establishes an open-economy dynamic stochastic general equilibrium (DSGE) model with two economies: China and the rest of the world. To assess the effects of oil price shocks, the CES production function is extended by adding oil as an input. Based on the model, the effects of four types of oil price fluctuations are evaluated. The four types of oil price shocks are supply shocks driven by political events in OPEC countries, other oil supply shocks, aggregate shocks to the demand for industrial commodities, and demand shocks that are specific to the crude oil market. Simulation results indicate the following: Oil supply shocks driven by political events mainly produce short-term effects on China's output and inflation, while the other three shocks produce relatively long-term effects; in addition, demand shocks that are specific to the crude oil market contribute the most to the fluctuations in China's output and inflation.

Keywords: Oil demand shocks; Oil supply shocks; Output; Inflation; DSGE model; China (search for similar items in EconPapers)
JEL-codes: E17 Q43 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (118)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:53:y:2016:i:c:p:101-110

DOI: 10.1016/j.eneco.2014.11.017

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