Effects Of International Commodity Price Fluctuation On China's Consumer Prices And Economic Output

Along with China's reform and opening, the development of Chinese economy is increasingly affected by many external factors. International commodity market is the major indicator of global economy and financial market. The volatility of commodity price would seriously impact the global economy, especially China that is highly dependent on international energy price. Therefore, the research on the effect of commodity price to Chinese economy is meaningful from both academy and policy-making perspective.In this paper, we analyzed the price transmission channel and effects of international energy, metal and food price fluctuations from 1999 to 2015 on China's economy, using the Directed Acyclic Graph technique and the impulse response and variance decomposition in the Vector Autoregressive (VAR) model. Through DAG analysis, the paper qualitatively derived the transmission channel of international commodity price to Chinese production factors and then applied VAR model to quantify the impulse effect among those factors. Through stability test, we concluded all quoted data are first-order stationary and according to LR, FPE, AIC, SC, HQ criteria, we selected the best lagging order. After setting up of VAR model, we performed impulse analysis for international commodity price on domestic CPI and PPI to test impulse strength and duration and then conducted variance decomposition to address the explanatory power of international commodity price on domestic economic variables.The result shows big difference in the transmission channel and effects of each category on China's consumer price and economic output growth. International energy price has obvious transmission channel and relatively huge impacts on both China's domestic consumer price level and economic growth, while international metal and food price only have strong effects on China's consumer price. We also found that none of the international price fluctuations are the main cause for China's macro-economic fluctuation, but some other external and domestic shocks are.