Effects of oil shocks and monetary shocks on Chinese economy: An empirical analysis

Crude oil occupies a principal position at the center of the world economy. Sharp increase in oil price may exert an influence on the economic activity and macroeconomic policies. Following by the escalating rise of emerging markets, growing dependence on energy resources and dramatically fluctuating energy resources prices, oil price has been the most popular topic of economic papers. I chose China because of its being an emerging market and its remarkable growing rate. Currently China plays a big role on the international scene and consequentially has a significant impact on the growth of global economy. The purpose of this paper is thus to shed light on the relevance of oil price changes as a significant source of Chinese economic fluctuations numerically. We found that the responses to the oil shock are as expected and consistent to the monetary policy. The effects occurred to be insignificant in exchange rate and inflation rate due to the quasi-fixed exchange rate. The monetary shock does not play a big role in Chinese economy. The variance decomposition of tells us the oil shocks play a major role in both the percentage of the fluctuation of GDP and inflation rate but no so much about the monetary shocks.