Empirical Research about the Dynamic Effect of Oil Price Shocks on China's Economic Development

Abstract

Although oil price rises rapidly in recent 10 years, China's macroeconomic situation has not been dampened by high oil price. High oil price and China's economic growth even demonstrates a positive relationship. Taking Chinese data from 1993 Q1 to 2008 Q2 as the research sample, the paper examines the causes of the dynamic relationship between oil price fluctuation and China's macroeconomic development from the angel of the sources of oil price shocks. First of all, oil price is decomposed into supply shocks, economic demand shocks and precautionary demand shocks using the method of Kilian (2007). Further empirical results indicate that when oil price rise is driven by supply shocks or precautionary demand shocks, oil price fluctuation is negatively correlated with China's economic growth and positively correlated with inflation; When oil price rise is driven by economic demand shocks, the positively stimulating effects on the economy is greater than the negative effects in the short term, then oil price rise and economic growth will move in the same direction. This positive correlation is much stronger in the second period. Consequently, China's government should take different coping strategies in the face of oil price rise driven by different sources.