Impact of Oil Price Shocks on China's Economy: A DSGE-based Analysis

This paper constructs a DSGE model to investigate the influences of oil price shocks on China's economy. Parameter estimation indicates that China's money supply mechanism does not target oil price shock, but makes a significant pro-cyclical response to output and a counter-cyclical reaction to inflation. It also shows that the persistence and volatility of oil price shocks are much stronger than that of other exogenous shocks. Impulse analysis exhibits that oil price shocks exert a lasting contraction effect on output and consumption, and meanwhile push inflation up. Furthermore, forecast error variance decomposition and historical decomposition reveal that the impact of oil price shock is stronger than other five shocks, and it is one of the main sources of China's economic fluctuation.