Essays on identifying oil price shocks and its dynamic impacts on macro economy: evidence from China
Date
2016
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Publisher
University of Delaware
Abstract
The famous energy crisis of 1973-1974 initially inspired a lot of studies on the influence of increasing oil prices in the macro economy of the United States. Many scholars attribute the major recessions, high inflation and slumping economic growth to soaring oil prices. However, after that, the association between higher oil prices and unsatisfying economic performance was weakened by the evidence that subsequent oil prices shocks with comparable magnitudes as that of 1970s did not lead to declining GDP and rising inflationary pressure; instead, both magnitudes remain relatively stable. This phenomenon could be the result of changing behavior of firms and households responding to fluctuations in the market of oil. It inspires a deeper and closer look at the different types of oil price shocks, which gives rise to the following interesting questions. Are oil price shocks alike? If not, do they have different impacts on the evolution of oil prices? Do major macroeconomic variables in other countries, like China, experience the same response patterns in respect to various underlying oil price shocks as the United States? Is China responsible for the soaring price of oil in 2008? Furthermore, the unexpected oil price declines since 1990s provide us with the opportunity to explore the question, is the relationship between economic behavior and real oil price symmetric in China’s situation?
The three essays in this dissertation investigate two main topics about oil price shocks. One topic attempts to identify oil price shocks from different resources and the other studies the dynamic influences of oil price shocks in the macroeconomy of China. The first essay attempts to disaggregate oil price shocks into six types while the second essay analyzes the behavior of major economic indicators in China in reaction to the variety of oil price shocks. The third essay focuses on testing whether the effect of oil price increases or decreases is symmetric in China.
In the first essay, I estimate a Structural VAR model to decompose shocks of oil price into six components: oil supply shocks, global demand shocks for all industrial commodities, U.S. money supply shocks, China’s money supply shocks, China’s real effective exchange rate shocks and shocks in oil specific demand. This disaggregation of oil price shocks endeavors to characterize the relative importance on the evolution path of oil prices from different perspectives: supply side, demand side, precautionary concern and monetary policy in both of the U.S. and China. The evidence in this study shows that, at any specific time, real oil price responds to a combination of structural shocks that change over time. Furthermore, different types of shocks behave differently in affecting oil price fluctuations. Actually, oil-specific demand shocks and China’s effective exchange rate shocks make the largest contribution to the fluctuations of oil price. While money supply shocks in U.S., money supply shocks in China and shocks in global aggregate demand cause relatively large impacts on oil price, oil supply shocks make little contribution to the dynamics of oil price.
The second essay analyses the impulse response patterns of the major macroeconomic variables in China w.r.t. the disentangled oil price shocks obtained in the first essay. The results show that the influence of oil price changes in China’s economy is majorly transmitted through the demand channel and the monetary policy channel. Specifically, positive oil supply shocks bring little impact on the majority of China’s macroeconomic indicators. An unexpected increase in global aggregate demand has very limited impact on China’s real consumption, real investment and real export. But, it has significant and positive impact on China’s real import, China’s value added and one year lending rate. Besides, positive innovations in U.S. money supply M2 causes little or small impact on most of China’s major economic indicators while positive China’s money supply shocks can possess a relatively large influence in real consumption and one year lending rate in China, although the effect is statistically insignificant for most of the projection period. At the meantime, positive shocks in China’s real effective exchange rate or an appreciation in RMB can have significant impact on the majority of China’s macroeconomic indicators. However, positive shocks in oil specific demand can only possess a small positive impact on China’s one year lending rate with partially statistical significance.
By extending the method proposed by Kilian and Vigfusson (2011), the third essay investigates whether the influence of oil price fluctuations in China’s macroeconomy is symmetric. The result reveals that the influences of oil price changes in major economic indicators of China are symmetric. This finding is reasonable, considering the more and more flexible exchange rate policy and the reform of interest rate marketization in China, which greatly reduces the frictions in the markets and smooths the capital and labor transferring among different sectors.