Is China's Economy Impacted by the Dynamics of Oil Prices?

China is the second largest oil importer in the world as of 2015. How China’s economy reacts to shocks in oil prices has been an important research topic. Existing literature shows that there are significant relationships... [ view full abstract ]

China is the second largest oil importer in the world as of 2015. How China’s economy reacts to shocks in oil prices has been an important research topic. Existing literature shows that there are significant relationships between major China’s macroeconomic indicators such as GDP, interest rate, export, and the shocks in oil prices. However, there is a void in the literature about whether these major macroeconomic measures in China would react to the shocks in oil prices homogenously or heterogeneously across the whole domain of the shocks in oil prices. Our study focuses on this topic. Specifically, we explore whether there are different impacts of oil price changes in the level and oil price volatility on China’s major macroeconomic indicators such as GDP, export, household consumption, and government consumption. Using quarterly data and multivariate time series modeling framework, we estimate and test the significance of these impacts in different information regimes. The information variables in this study are oil price changes and oil price volatility. Furthermore, we employ impulse response analysis in each regime identified from the multivariate time series model to investigate the dynamics of the impacts of oil price changes and volatilities.