The Economic Responses And Optimal Monetary Policy To Oil Price Shocks

International Energy Market is one of the most turbulent fields in 21st century. Since 2008, the world crude oil price has experienced several shape fluctuations, while Chinese macro-indicators, such as GDP and consumer price level, also changed for noticeable degree. Until the second half of 2014, WTI oil price experienced a steep fall to 45 dollar per barrel, the lowest during recent five years, due to US economy recovery, stronger dollar, weak commodity prices and slowdown of Chinese economy. This plummet of world oil price led the international energy market a new series of shakes and raised the uncertainty of the energy price trend in the future.In order to explore whether the conclusions of petroleum economic theories are applicable to Chinese macro-economic situation, this paper firstly set up the structural vector auto regression model and analyzed whether and how international crude oil prices, as well as its rise and fall, changed the main macroeconomic variables, namely GDP, CPI and M2 in China. The empirical results show significant linkages between these macroeconomic variables and oil price. By Impulse Response Function, one unit of positive shock on oil prices floated the consumer prices due to the increasing cost of raw materials, through industrial chain. It also leads consumption price level to go up and to maintain the upward trend in a long period. During this period, the level of output appeared a short-term decline, and would gradually recover stabilized in six months. Because of the implementation of monetary policy aimed to relieve the inflation after oil price shock, money supply, M2, will sustain to decline in the short term.After noticing the effect of oil price on Chinese economy, this paper tries to explore how the world oil price distorted Chinese economy. Therefore, the commercial and financial feature of oil, as well as how its price fluctuation impact USA financial market, especially on exchange rate, other commodity prices, stock market and the monetary policy tools have been introduced. Then, this paper establishes the global vector auto regression (GVAR) model, which contains 33 countries'economic and financial indicators within. The empirical results of this model show that, the international oil price fluctuations has significant effect on China's price level, resulting from the international stock price changes -- the rise in oil prices will push pressure on stock market and therefore to price level. And now the influencing factors of international crude oil prices become more complex, severe concussion frequent energy market, China's macro economy also will be ups and downs. Above all, the financial market played a crucial role in transmitting oil price shocks.Based on the commodity attribute of oil, this paper used the DSGE model established two sets of economic system in which petroleum plays the role of raw material. Also, each system has Taylor's rule or McCullum's rule as its monetary policy rule, to examine which rule's monetary policy regulation effect is superior after the oil price shocks occurred. In the policy experiment on the linkage of monetary policy and fluctuations of oil prices, it was found:when establishing positive relation between the interest rate and international oil price shock, the output level will fall down due to rising interest rates, and in the subsequent rapid recovery to the steady state level; meanwhile the price level will also decreases because interest rates rises. If oil prices increase coincides with the central bank to lower the interest rate level, the level of output will sharply rise due to lower interest rates but price level will rise to high. Relatively speaking, the McCullum's rule shows a similar performance on inflation as Taylor's rule, but the output will decline for much longer time.Next, basing on oil's commodity and financial attributes, the "financial accelerator" is added into the original DSGE model, stressing the important role of financial sector played in oil price shocks and monetary policy adjustment. It shows that if the central bank implement tightening monetary policy due to the oil price rise following Taylor's rule, then the output will experience a sudden drop in the short term, but recover faster than in the former model; while the inflation rate will also experience sag, the degree of which is relatively large, but recovers more quickly. However, the stock price will plummet and recovered to the level higher than steady state. Compare McCullum's rule and Taylor's rule, the double impact of McCullum's monetary policy regulation needs longer time for economy to recover, and its influence to economy is less than Taylor's rule.Based on the empirical and test results, this thesis provides several suggestions on how to cope with fluctuations of international oil prices and implement monetary policy appropriately. First of all, in order to reduce the dependency of Chinese economy on international crude oil prices, we should promote domestic oil and gas resources exploration, develop new energy technologies, and actively seek the international crude oil alternative energy. Also, we need to speed up the construction of the domestic petroleum financial system, and strive to obtain the pricing right of crude oil. Meanwhile, in order to rationally implement monetary policy regulation, the central bank should speed up the marketization of interest rates, and steadily progress the application of Taylor's rule in China's monetary policy, improving the efficiency of monetary policy.