Impact Of International Oil Price Shocks On China’s Output And Inflation

China is playing an increasingly important role in the demand side of the global oil market.With the deepening of industrialization,China,as an emerging economy,has a growing demand for oil.Oil consumption ranks second among all countries in the world.The degree of oil dependence on foreign countries has also increased steadily,reaching 67.4%by 2017.and has become the world’s largest oil importer since 2015.China’s participation in the international crude oil market is deepening day by day.Oil price fluctuation is one of the important factors affecting the fluctuation of economic cycle.Understanding the meaning behind it is undoubtedly of great significance for understanding China’s macroeconomic fluctuation,and it is also of reference value for understanding the behavior of China’s monetary policy in responding to the corresponding macroeconomic shocks.In this paper,74 macroeconomic indicators are selected to measure China’s economy in comparison with Stock’s(2005)classification of US macroeconomic data when studying the dynamic factor model.Because the existing macro data in China have various statistical calibers,some of them have errors in calculation,and the statistical year is short.Referring to the data processing methods of Higgins and Zha(2015),this paper deals with the above 74 indicators according to the categories of output,industrial added value,sub-sector investment,bank loans,import and export,price index and so on.After processing,there is no missing value in the data set from 2002 to 2014 and the above problems may exist in the measurement of the original data set are eliminated to the greatest extent.Then common factors were extracted.Then,using Kilian(2009)as reference,the oil price is decomposed into oil supply shocks,aggregate demand shocks and preventive demand shocks.Vector autoregressive model(FAVAR)with factor augmentation is constructed by using common factors of oil supply shock,aggregate demand shock and extraction,GDP growth rate,inflation rate and M2 growth rate,respectively.The effects of oil price shock on output and price level are discussed from supply side and demand side.Firstly,based on the historical decomposition of oil price shocks,this paper finds that oil price shocks are mainly explained by demand shocks and preventive demand shocks,while supply shocks can only account for 6.5%of oil price shocks.The results of FAVAR model show that the increase of supply in the international crude oil market does not increase the growth rate of domestic output.The reason behind this may be that domestic oil prices have not significantly reduced the production costs of manufacturers due to price rigidity,which will not effectively stimulate the growth of output.At the same time,the impact of oil price shocks on domestic inflation is not significant.The model of oil price shocks on demand side shows that the growth rate of GDP per unit of forward shocks of crude oil demand decreases.As an intermediate input,the rising price of oil increases the production cost of enterprises,and the mode of economic development in China relies heavily on exports from 2002 to 2008.The rising price of oil increases the transportation cost,so that the cost of export commodities increases accordingly,thus restraining the output growth of export enterprises.As the data selected in this paper are 2002-2014,the global financial crisis spanning 2008 may change China’s macroeconomic environment.Therefore,two time points,the second quarter of 2008 and the first quarter of 2011,are selected to analyze the impact of oil prices on China’s economy before the financial crisis and after the implementation of China’s four trillion yuan plan.The research using TVP-FAVAR model shows that the trend of impulse response in the second quarter of 2008 is basically the same as that in the first quarter of 2011.Facing the supply shock of oil price,in order to recover the declining output,the first step is to issue more money to ease the downward pressure of the economy,and then to control inflation,the liquidity of money has been tightened and the price level has been better controlled.In the face of the impact of global aggregate demand on oil prices,China’s monetary policy still focuses on curbing inflation,because the economy was overheated before the 2008 financial crisis,so GDP growth rate did not fluctuate significantly.Inflation in 2011 fluctuated more sharply than it did in 2008 when demand shocks hit.The reason may be that after the financial crisis,the focus of monetary policy was mainly on stimulating economic growth,while price control became relatively loose,but it still returned to a reasonable level faster in the face of shocks.Generally speaking,through the regulation and control of monetary policy,China’s economy can better withstand the impact of foreign oil prices and keep the economy running smoothly and healthily.When domestic and foreign scholars participate in the study of the impact of oil price shocks on the economy,they generally assume that oil price shocks are exogenous variables,ignoring the endogenous impact of China’s economy on oil price shocks.Secondly,in the study of the impact of oil price shocks on China’s economy,due to the complexity of China’s economic indicators,there are many indicators and often different statistical calibres,and there is a lack of data,there is no suitable set of data covering China’s main economic variables.Based on Higgins and Zha’s(2015)method,this paper extends and constructs a set of macro data sets and establishes a factor augmentation model of time-varying coefficient to examine the impact of oil price shocks on China’s output and inflation.In the robustness test,the number of change factors and the exogenous nature of variables are examined.It is found that the results do not change much.The conclusion of this paper is more robust and reliable.However,due to the short year of data and the quarterly frequency of data,the amount of data is small,and this paper only studies the spot of crude oil,lack of research on futures,and often the particularity of the procurement of industrial enterprises,futures prices also have a certain impact on its production,which need to be further improved.