Skip to main content
×
Home
    • Aa
    • Aa

OIL PRICE SHOCKS, INFLATION, AND CHINESE MONETARY POLICY

  • Yunqing Wang (a1), Qigui Zhu (a2) and Jun Wu (a1)
Abstract

This paper proposes a New Keynesian dynamic stochastic general equilibrium model of the Chinese economy incorporating the demand of oil to study the effects of oil price shocks on the business cycle. The model answers several questions, including how monetary policy should respond to the disturbances from such shocks, and whether monetary authorities should use core inflation or headline inflation including oil price inflation as the monetary policy rule. The contributions could be summarized as follows: First, the model reveals that the oil transmission mechanism is determined by the nominal inertia, income effect, and the portfolio allocation effect. Second, both noncore inflation monetary policy and core inflation monetary policy that are simultaneously pegged to oil prices fluctuations are inferior to the monetary policy purely pegged to core inflation. Our findings suggest that the monetary policy should focus on core inflation instead of headline inflation.

Copyright
Corresponding author
Address correspondence to: Yunqing Wang, School of International Finance, Shanghai Finance University, Room 705, East Sub-building, Guanghua Tower, Fudan University, 220 Handan Road, Shanghai 200433, China; e-mail: wodewyq@sina.com.
Footnotes
Hide All

We are thankful for the useful comments from the editor and two referees. This work is supported by the Project of the National Social Science Fund of China (15CJY064), Project of Humanities and Social Sciences for the Youth in Ministry of Education of China (14YJC790129), Project of Scientific Research in Shanghai Finance University (SHFUKT15-01) and Major Project of the National Social Science Fund of China (14ZDA013).

Footnotes
References
Hide All
Vipin Arora , Pedro Gomis-Porqueras , and Shuping Shi (2013) The divergence between core and headline inflation: Implications for consumers' inflation expectations. Journal of Macroeconomics 38, 497504.

Ben S. Bernanke , Mark Gertler , and Mark Watson (2004) Oil shocks and aggregate macroeconomic behavior: The role of monetary policy. Journal of Money, Credit and Banking 36, 287291.

Martin Bodenstein , Christopher J. Erceg , and Luca Guerrieri (2008) Optimal monetary policy with distinct core and headline inflation rates. Journal of Monetary Economics 55, S18S33.

Guillermo A. Calvo (1983) Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12 (3), 383398.

Shu-Hua Chen (2015) Macroeconomic (in) stability of interest rate rules in a model with banking system and reserve markets. Macroeconomic Dynamics 19 (07), 14761508.

Christopher J. Erceg , Dale W. Henderson , and Andrew T. Levin (2000) Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46 (2), 281313.

Mary G. Finn (1995) Variance properties of Solow's productivity residual and their cyclical implications. Journal of Economic Dynamics and Control 19 (5), 12491281.

Mary G. Finn (2000) Perfect competition and the effects of energy price increases on economic activity. Journal of Money, Credit and Banking 32 (3), 400416.

Bao Tan Huynh (2016) Macroeconomic effects of energy price shocks on the business cycle. Macroeconomic Dynamics 20 (03), 623642.

Lutz Kilian (2009) Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. American Economic Review 99 (3), 10531069.

In-Moo Kim and Prakash Loungani (1992) The role of energy in real business cycle models. Journal of Monetary Economics 29 (2), 173189.

Finn E. Kydland and Edward C. Prescott (1982) Time to build and aggregate fluctuations. Econometrica 50 (6), 13451370.

Vo Phuong Mai Le Le , Kent Matthews , David Meenagh , Patrick Minford , and Zhiguo Xiao (2014) Banking and the macroeconomy in China: A banking crisis deferred?. Open Economies Review 25 (1), 123161.

Sylvain Leduc and Keith Sill (2004) A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns. Journal of Monetary Economics 51 (4), 781808.

Kiseok Lee and Shawn Ni (2002) On the dynamic effect of oil price shocks: A study using industry level data. Journal of Monetary Economics 49 (4), 823852.

Frederic S. Mishkin (2007b) Inflation dynamics. International Finance 10 (3), 317334.

Carlos Montoro (2012) Oil shocks and optimal monetary policy. Macroeconomic Dynamics 16 (02), 240277.

Julio J. Rotemberg and Michael Woodford (1996) Imperfect competition and the effects of energy price increases on economic activity. Journal of Money, Credit and Banking 28 (4), 549577.

Stefano Siviero and Giovanni Veronese (2011) A policy-sensible benchmark core inflation measure. Oxford Economic Papers 63 (4), 648672.

Frank Smets and Raf Wouters (2003) An estimated dynamic stochastic general equilibrium model of the Euro area. Journal of European Economic Association 1 (5), 11231175.

Frank Smets and Raf Wouters (2007) Shocks and frictions in U.S. business cycles: A Bayesian DSGE approach. American Economic Review 97 (3), 586606.

Stefania Villa (2016) Financial frictions in Euro area and the United States: A Bayesian assessment. Macroeconomic Dynamics 20 (05), 13131340.

Yunqing Wang and Qigui Zhu (2015) Energy price shocks, monetary policy and China's economic fluctuations. Asian-Pacific Economic Literature 29 (1), 126141.

Wenlang Zhang (2009) China's monetary policy: Quantity versus price rules. Journal of Macroeconomics 31 (3), 473484.

Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords:

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 9 *
Loading metrics...

Abstract views

Total abstract views: 86 *
Loading metrics...

* Views captured on Cambridge Core between 17th July 2017 - 26th September 2017. This data will be updated every 24 hours.