The Impacts Of International Oil Shocks On China’s Macroeconomy Based On Wavelet Analysis

Crude oil, as a non-renewable scarce resource, is an important production material in a modern industrial economy and also an essential strategic resource. With the increasing domestic demand gap of crude oil in China and its dependence on imported oil, international oil shocks will have more significant effect on China’s national economy than ever. The effects of oil price shocks on China’s macroeconomy vary across short-, medium- and long-term. For making short-, medium- and long-term macro-control policy, it is vital to better understand the effects of oil shocks on China’s macroeconomy at different time-frequency domains. This paper studied on the multiscale characteristics of the effects of international oil shocks on China’s macroeconomy and its changes over time.The oil prices and macroeconomic indicators are defined as time series, so their interdependence also can be also defined as time series. These time series hide different time-frequency information. The existing research show that the interdependence between oil prices and macroeconomy is non-linear, asymmetry and changes over time. For the relationship and the effect between international oil prices and China’s macroeconomy, the previous studies mainly focus on the holistic time horizon without different time-frequency analysis. This study proposes a framework for analyzing multiscale causality relationship between bivariate economic time series through combining maximal overlap discrete wavelet transform(MODWT), granger causality test, cross wavelet analysis. Firstly, decomposing the time series into different frequency elements, and then apply Granger causality test to unveil the multiresolution properties of the effects of oil shocks on China’s macroeconomy. And then decompose the oil shocks into positive and negtive shocks to analyze the asymmetry effects of oil shocks on China’s macroeconomy by MODWT and granger causality test. Thirdly, the paper studied on the effects of oil shocks on China’s macroeconomy at different time-frequency domains by applying the cross wavelet analysis.This paper chose monthly data of Brent spot oil prices, growth rate of China’s industrial added value, CPI, PPI, interest rate, exchange rate, Shanghai Composite index from January 1999 to September 2014 as sample data. Through MODWT combined with Granger causality test, the results found the multiresolution features of impact of oil shocks on China’s macroeconomy for the short-, medium- and long-term. There is a significant asymmetry between the positive and negative oil shocks and the negative oil shocks have more significant impact on China’s macroeconomy. And then cross wavelet analysis has been applied to analyze the time-varying characteristics of oil shocks at different periods. The results found the major volatility intervals of the oil price and the indicators at different time-frequency domains. The oil shocks mainly have positive effect on the growth rate of China’s industrial added value, CPI, PPI, Shanghai Composite index for all periods; the exchange rate for medium and long term; and interest rate for short term. The effects of oil shocks become more significant after the global financial crisis in 2008. Hence, the paper provides a novel idea for studying the fluctuation of China’s macroeconomic indicators based on the international oil shocks in the future.