Does China's Macroeconomy Respond to the Shocks to Oil Price and its Uncertainty?: A Generalized Interactive VAR-SV-In-Mean Approach

Abstract

In this paper, we re-investigate the effects of oil price and its uncertainty on China’s macroeconomic activities using a monthly generalized VAR model with stochastic volatility in mean, named interactive VAR-SV-in-mean model, which allows for interactions amongst variables’ levels and volatilities and the correlations between the level and volatility shocks. Different from previous studies, we qualify the time-varying specification only on volatility by the method proposed in Chan and Eisenstat (2018) before conducting the empirical investigation. Counterintuitively, although China plays as a net oil importer and the 2nd largest oil consumption country, our empirical findings suggest that China’s macroeconomy responds little to the shocks to oil price and its uncertainty in general. Moreover, we argue that financial depth and trades of oil-related derivative contracts, together with coal-dominated energy consumption structure and oil price subsidies, make the economy less responsive to the shocks. Our results, as well, are much robust to several model specifications.