The Influence Of Oil Shocks On China’s Macro-economy And The Adjustments Of Monetary Policy:an Empirical Analysis

This paper investigates the relationship between the oil price shocks and the macro-economy of China, using structural vector auto-regression. More importantly, I examine the adjustments of monetary policy associated with the fluctuation of oil price and macro-economy. Unlike most of the previous researches, the results show that China’s output level is positively correlated with the world oil price. I propose a mechanism that the effects of oil price fluctuation on China and its main trade-partner are significantly different to explain this abnormal phenomenon, which is expected to improve China’s trade condition. This mechanism is also strongly backed by my empirical work. To the best of my knowledge, there is still no paper thoroughly concentrating on this issue empirically. The simulations suggest that money supply and interest rate are typically operated, reverse to the macro-economy activities and oil price. What worthy-note is, confronting with exogenous shocks, interest rate is even more sensible than money supply, which is utterly critical to increase our knowledge of our monetary policy. In the light of stability issue, I consider the nonlinearity of oil price. The oil price shocks still influence China’s output positively, yet the price level rise is not followed any more, which is rather counter-intuitive. I suppose this could be largely accounted for by the micro-mechanism of the nonlinear oil price. Again, according to the information1have, although a multitude of preeminent studies have explored the nonlinearity of oil price and its implication on macro-economy, it is the first paper that interprets the effects of nonlinear oil price on macro-economy based on its micro-mechanism, closely correlated with the individuals’ expectation. Note that oil shocks result in no output declines and inflation is also not expected under nonlinear oil price specification, substantial monetary adjustment is, thus, not needed here. As a matter of fact, compared to the linear specification, the simulation demonstrates that the response sensitivity of monetary supply and interest rate is substantially reduced, which roughly signifies the current monetary policy is not bad.