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Journal article
Oil price shocks and China's economy: Reactions of the monetary policy to oil price shocks
Energy economics, v 62, pp 61-69
01 Feb 2017
Featured in Collection : UN Sustainable Development Goals @ Drexel
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. (C) 2016 Elsevier B.V. All rights reserved.
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Details
- Title
- Oil price shocks and China's economy: Reactions of the monetary policy to oil price shocks
- Creators
- Won Joong Kim - Konkuk UniversityShawkat Hammoudeh - Drexel UniversityJun Seog Hyun - Konkuk UniversityRangan Gupta - University of Pretoria
- Publication Details
- Energy economics, v 62, pp 61-69
- Publisher
- Elsevier
- Number of pages
- 9
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Web of Science ID
- WOS:000397376200005
- Scopus ID
- 2-s2.0-85008705414
- Other Identifier
- 991019167721304721
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- Collaboration types
- Domestic collaboration
- International collaboration
- Web of Science research areas
- Economics