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The Transmission Mechanism of Oil Price and How Oil Price Fluctuation Affects Regional Economies

Author: LiangHongFeng
Tutor: YangJiSheng
School: Huazhong University of Science and Technology
Course: Quantitative Economics
Keywords: Panel data SVAR Oil Price Macroeconomy Monetary Policy Regional Economies
CLC: F416.2
Type: Master's thesis
Year: 2012
Downloads: 3
Quote: 0
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From the year of2002to2008, the world has witnessed a significant increase of theoil price. As for our country, the rapid development of industrialization and urbanizationhas made the oil consumption increasingly higher. Now China has become the secondlargest importer of crude oil around the world. Besides, the domestic oil pricingmechanism has been revised to make domestic oil price more closely correlated with theinternational prices, therefore, the influence of international oil price fluctuations on ourcountry’s macro-economy cannot be ignored.Oil price fluctuations could affect one economy through cost push. Both theincrease of oil prices and the shock of the economy may cause the monetary authority toimplement certain monetary policy, which we call endogenous monetary policy. In thispaper, a panel structural VAR model is used, on the one hand, to analyze how thefluctuation of international oil prices between2002and2008would affect China’smacro-economy and meanwhile, to examine the response of monetary policy to thefluctuation of oil prices. On the other hand, in this paper, we classified30provinces andcities of China (Tibet is excluded) into3regional groups-the east, the west and themiddle part, and examined the effects of oil price fluctuation on the economies of thisthree regions.We discover that, an increase of oil price would lead to an increase of price level,and in the long run, a slowdown of the growth rate of Industrial Added Value. Besides,the increase of both the oil price and price level would cause the monetary authority todecrease the monetary supply. However, in the long run, as the growth rate of IndustrialAdded Value slows down, the monetary supply tends to increase. What’s more, the studyof regional effects of oil price show that, the east of China would respond negatively tothe oil price impact while the west would respond positively, and the middle part positively first and negatively then. Besides, the PPI of this three regions also respondsdifferently to the oil price impact.

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