The asymmetric effects of international oil prices, oil price uncertainty and income on urban residents’ consumption in China

Abstract

This study employs the nonlinear autoregressive distributed lag (NARDL) model to investigate the asymmetric effects of international oil prices (oil price uncertainty) and urban residents’ income on consumption in China. The empirical results show that the asymmetric effects of oil prices (oil price uncertainty) and urban residents’ income on consumption are significant in the both the short- and long-term. Specifically, increasing urban residents’ consumption significantly respond to a decline in oil prices while there is no obvious decreased consumption response to a rise in oil prices due to the wealth transfer effect. We also observe that the stimulating effect of falling oil price uncertainty on urban residents’ consumption is noticeably stronger than the adverse effect of increasing oil price uncertainty on consumption because of the expectation effect. Finally, we find that the asymmetric effect of income changes on consumption is significant due to the ratchet effect, whereby an income increase has a stronger stimulus effect than the reducing effect of income decline on consumption.