The effects of petroleum product price regulation on macroeconomic stability in China

Abstract

China has undertaken measures to regulate the prices of petroleum products since 1998 in order to deal with the world oil price shocks on its macro-economy. However, the effects of price regulation are yet unknown, especially when the world oil price fluctuates in different regimes. The study first analyses the mechanisms of petroleum product price (PPP) regulation (in the case of gasoline) and the crude oil-gasoline price fluctuation transmission, followed by the identification of regimes and their time intervals using regime-switching vector autoregressive model, and then estimates the effects of gasoline price regulation in reducing macroeconomic volatility. It is found that the world crude oil fluctuates in different regimes (the mild-fluctuation regime and the violent-fluctuation regime), the PPP regulation can reduce oil price volatility and then macroeconomic volatility, but it is more effective in the mild-fluctuation regime. The findings present a deeper understanding of the stabilization effect of PPP regulation on the macroeconomy, provide an evidence for sustaining China's PPP regulation for the purpose of macroeconomic stability, and offer policymakers new information for petroleum product pricing reforms.