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How does the Chinese economy react to uncertainty in international crude oil prices?

Author

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  • Cheng, Dong
  • Shi, Xunpeng
  • Yu, Jian
  • Zhang, Dayong
Abstract
This paper investigates the dynamic impacts of uncertainty in international crude oil prices on the Chinese economy. We use two measures, sample standard deviation and conditional standard deviation estimated from a GARCH (1,1) model, to calculate uncertainty in oil prices. We find that an increase in volatility in oil prices tends to reduce the real gross domestic product (GDP) and investment, which in turn encourages the Chinese government to stabilize the economy through expansionary fiscal and monetary policy. Furthermore, when we differentiate the impacts of increases and decreases in oil price uncertainty, we obtain a symmetric result. An increase in oil price uncentainty reduces real GDP and investment, while a decrease boosts the macroeconomy. We attribute the effect of decreasing uncertainty to the combined factor of falling uncertainty and an expansionary monetary and fiscal policy. A cross-sectional check related to economic geography indicates that uncertainty shocks to oil prices has a significantly greater negative impact on real GDP and investment in eastern China, where the economy is more industrialized and depends more heavily on oil than other regions.

Suggested Citation

  • Cheng, Dong & Shi, Xunpeng & Yu, Jian & Zhang, Dayong, 2019. "How does the Chinese economy react to uncertainty in international crude oil prices?," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 147-164.
    • Handle: RePEc:eee:reveco:v:64:y:2019:i:c:p:147-164
    DOI: 10.1016/j.iref.2019.05.008
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    More about this item

    Keywords

    Chinese economy; Oil price; Structural VAR; Uncertainty shocks;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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