The Effects And Choices Of Monetary Policy And Oil Price Shocks

As we know, the world oil price has risen rapidly in the past few years, and the highest oil price reached 147 dollars per barrel in July 2008. As one of the important energy resources, high oil prices will cause the overall price level to rise and finally it will lead to inflation, and affect the macroeconomics.On the one hand, oil price shocks affect the economic through oil price itself directly, and on the other hand it also can affect the economic through the tightening monetary policy indirectly. According to the current situation of China, this paper studies how much of the decline in output is the direct result of the increase in oil prices, as opposed to the ensuing tightening of monetary policy faced to high oil prices, based on much related literature on this field.In this paper, the author summarizes existing research conclusions first, and then describes the performance of oil price shocks and the economic fluctuation during past several decades, especially the performance of monetary policy and macroeconomics in China. Furthermore the author analyzes related theories about transmission channel of oil price shocks and the choices of monetary policy. And also the author classifies the transmission channel into two ways: monetary policy channel and non-monetary policy channel.In the chapter of empirical analysis, this paper discusses the effect of monetary policy faced to oil price shocks in China since 1996, through using vector error correction (VEC) model, impulse response function and variance decomposition. In conclusion, the results suggest that an important part of the negative effect of oil price shocks on the economy doesn't result from the change in oil prices, per se, but from the resulting tightening of monetary policy. Furthermore the government chooses adjusting interest rate more frequently than money supply.At the end of the paper, the author proposes some related suggestions according to these results. Meanwhile the author also refers that some problems are still left for further research.