The Impact of Oil Price Volatility on China’s Economy: An Empirical Investigation Based on VAR Model

Abstract:

China has been in rapid economic growth and industrial structure reform for recent years, and oil, as a most important raw material for industrial production, its price fluctuations have direct impact on energy-intensive industries as well as non-energy-intensive industries and their associated industries’ overall demands. Under the price transmission mechanism, oil price volatility imposes significant influences on economic growth rate, price level, unemployment rate and monetary policy as well. This paper established VAR model among oil prices and economic indicators such as economic growth rate, price level, unemployment rate and monetary policy, and by data processing , stability test and cointegration test, we found that there existed long term stable cointegration relations among these sequences; through Granger Causality test we found that oil price volatility was the Granger cause of the fluctuations of economic growth rate, price level and monetary policy, and meanwhile, changes in economic growth rate is the Granger cause of that in price level. The result of our empirical study indicated that, oil price volatility has a profound influence on China’s economy, and thus, China should improve the establishment of the oil futures market to avoid risks of oil price volatility and secure long-term stability of its economic growth.

• Periodical: Advanced Materials Research (Volumes 524-527)
• Pages: 3211-3215
• DOI: https://doi.org/10.4028/www.scientific.net/AMR.524-527.3211
• Online since: May 2012
• Authors: Shu Ping Wang, Ai Mei Hu, Zhen Xin Wu
• Keywords: Economic Growth Rate, Granger Causality, Oil Price Volatility, VAR

References

[1] Hamilton J.D., (2004), "Oil and the macroeconoy". J. University of California, San Diego, Department of Economics.

[2] Barsky, Robert and Kilian Lutz, (2004), "Oil and the macoeconomy since the 1970s". J. NBER Working Paper, no.10855.

[3] Cunado J., Perez De Graciaf, (2003), "Do oil price shocks mater? Evidence for some European countries.". J. Energy Economics, vol.25, no.2, pp.137-154.

DOI: 10.1016/s0140-9883(02)00099-3

[4] Hamilton J.D., (2003), "What is an oil shock?". J. Journal of Econometrics, no.113, pp.363-398.

[5] Huang B.N., Hwang M.J., Peng H.P., (2005), "The asymmetry of the impact of oil price shocks on economic activities: an application of the multivariate threshold model". J. Energy Economics, vol.7, no.3, pp.455-476.

DOI: 10.1016/j.eneco.2005.03.001

[6] Lardic S., Mingnon V., (2006), "The impact of oil prices on GDP in European countries: an empirical investigation based on asymmetric cointegration". J. Energy Policy, vol.4, no.18, pp.147-168.

DOI: 10.1016/j.enpol.2005.09.019

[7] Leduc S., Sill K., (2004), "A quantitative analysis of oil price shocks, systematic monetary policy and economic downturns". J. Journal of Monetary Economics, vol.51, no.4, pp.781-808.

DOI: 10.1016/j.jmoneco.2003.09.004

[8] Yu Bo, Chi C.J., Su G.F., (2002), "Measure model of the impact of oil price shocks on national economy". J. The Journal of Quantitative& Technical Economics, vol.19, no.5, pp.34-46(in Chinese).

[9] Liu Qiang, (2005), "Model study of the impact of oil price volatility on China's economy". J. The Journal of Quantitative& Technical Economics, vol.22, no.3, pp.102-136(in Chinese).

[10] Yu Wei, Yin J.D., (2005), "Empirical study of impact of crude oil price volatility on China's economy". J. Industrial Economics Research, no.6, pp.46-59(in Chinese).

[11] Rong Y.H., (2004), "Monetary policy in reaction to oil price rising". J. China Finance, vol.23, pp.14-26(in Chinese).

[12] Liang Q.M., Wei Y.M., Fan Ying, (2004), "A Model for scenario analysis of China's energy requirement and energy intensity and its applications". J. Journal of Management Sciences in China, no.7, pp.62-68(in Chinese).

[13] Lee H.K., ect., (2006), "Impact of oil price volatility on China's Price Level". J. Statistics and Decision, no.3, pp.81-83