۱- Introduction

۲- Data and empirical methodology

۳- Empirical results and analysis

۴- Conclusions and policy implications

References

Abstract

Using a time-varying parameter structural vector autoregression with stochastic volatility (TVP-SVAR-SV) model, we decompose the structural shocks of oil price fluctuations into four types: oil supply shocks, global demand shocks, domestic demand shocks and oil-specific demand shocks. We then analyze the time-varying effects of these oil price shocks on China’s inflation at the import, production and consumption stages using monthly data from January 1999 to December 2016. The results show that the pass-through effects of the four types of oil price shocks on China’s inflation at each stage are time-varying and that there are significant differences at different time horizons and points in time. The analysis of the variance decomposition shows that the effects of oil price shocks on China’s inflation at each stage are incomplete and decrease along the price chain. The increase in oil prices driven by oil-specific demand shocks is the most important cause of China’s inflation at the import and production stages during the full sample period, while China’s inflation at the consumption stage is mainly affected by domestic demand shocks. In addition, the inflationary effects of oil price shocks have been dramatically weaker since the international financial crisis compared with before the crisis.

Introduction

As an important component of production and transportation costs, oil price plays an indispensable role in inflation (Prat and Uctum, 2011; Myers et al., 2018). In recent years, with the acceleration of China ’s industrialization and urbanization, the demand for crude oil has been very high, and China has become the second largest crude oil consumer after the U.S. , consuming 578.7 million tons , or approximately 13.1% of global oil demand , in 2016 (BP Statistical Review of World Energy, 2017). Therefore, China’s sustainable economic development is highly dependent on oil (Wen et al., 2016; Gong and Lin, 2017; Zhang et al., 201 7 ; Gong and Lin, 2018a). However, domestic production cannot supply the amount of oil required for economic growth, and China must import a large amount of crude oil from the international market. Thus, its dependence on crude oil imports is relatively high. In 2016, China imported 381 million tons of crude oil, and its dependence on foreign crude oil increased to 65% (China Petroleum Enterprise Association, 2017), exceeding the security limit of 50%. In addition, with the adjustment of the domestic oil price formation mechanism in 2001, China’s oil prices gradually integrate d with international oil prices (Li et al., 2017) .