International Oil Price Shocks On China's Exchange Rate And Output Conduction Mechanism Study

In recent years, international oil price fluctuated severely. This dissertation studies on international oil price shocks. It focuses on the transmission mechanisms of the international oil price shocks on the exchange rate and output of China. The research on transmission mechanisms of the international oil price shocks is relatively weak in China. It is important in theory and practice for this thesis on this topic.Firstly, on the basis of a dynamic partial-equilibrium portfolio model on Krugman (1980), the transmission mechanisms of the international oil price shocks on the RMB real exchange rate has been analyzed. Combined with Chinese real situation, the author argued that the transmission effect of international oil price shocks on RMB real exchange rate is appreciation.Secondly, several empirical VAR models and different exchange rates have been studied on the basis of flexible-price monetary approach. Results indicate that there are transmissions of the international oil price shocks on the RMB nominal exchange rate from Jan.1994 to Aug.1995 and from Jul.2005 to Dec.2009, but there is no transmission from Sep.1995 to Jun.2005. The transmission exists in the international oil price shocks on the RMB real exchange rate from Jan.1994 to Dec.2009. If international oil price rises, RMB real exchange rate will depreciate in advance, and then appreciate. The variance of RMB real exchange rate can be decomposed into several parts and are generated 3.91%,4.02%, 4.05%,4.05% by the impact of the individual innovations on the variable of the international oil price, when a forecast over 6months,1 year,2 years,3years periods is performed.Thirdly, there are two the transmission mechanisms of the international oil price shocks on the RMB real exchange rate. They are balance of payments and price transmission mechanisms. After the international oil price shocks, the export and import of China increase, and the inflation in US and China rise. But, the inflation in US reactions more swiftly and then more lightly than that in China. These two transmission mechanisms have four in-between variables:Chinese export and import, the inflation in US and in China. These in-between variables have different influences on transmission. The effect by synthesis of transmission effects is that international oil price shocks boost Chinese output.Fourthly, in a dynamic equilibrium framework on Blanchard (2007) and NOEM on Shi (2006), the transmission effect of the international oil price shocks on Chinese output and three transmission mechanisms have been proved. Three transmission mechanisms are balance of payments, RMB real exchange rate and production cost transmission mechanisms.Fifthly, two empirical VEC models have been studied by the quarterly data from 1994Q1 to 2009Q4. Results testify that there is transmission of the international oil price shocks on Chinese output. If international oil price rises, Chinese output will increase, the variance of Chinese output can be decomposed into several parts that are generated 25.57%, 29.68%,32.18% by the impact of the individual innovations on the variable the international oil price, when a forecast over 1 year,2 years,3years periods is performed.Sixly, three mechanisms exist in the transmission of the international oil price shocks on Chinese output. The transmission mechanism of balance of payments is the most important, the other two are subordinate. The effect by synthesis of transmission effects is positive for Chinese output.Finally, the paper investigates how the difference between domestic and abroad oil price influence the transmission mechanisms by empirical VAR model. Results show that this difference will be enlarged while international oil price rises, and under the special oil price mechanism in China, international oil price shocks will promote Chinese output.