TITLE:
Oil Price Shocks, Durables Consumption, and China’s Real Business Cycle
AUTHORS:
Yunqing Wang, Xinyu Sui, Wenjie Pan
KEYWORDS:
Oil Price Shocks, Durables Consumption, Real Business Cycle, The Chinese Economy
JOURNAL NAME:
Modern Economy,
Vol.10 No.4,
April
24,
2019
ABSTRACT: Motivated
by the facts that the sharp volatility in international oil prices has become
one of the important external sources in driving China’s economic fluctuations,
and in view of the strong correlation between oil and consumer durables, we
build a real business cycle (RBC) model incorporating durable goods consumption
in the context of oil price shocks. Using quarterly data on Chinese economy to
conduct an empirical test, we examine China’s cycle characteristics of
macroeconomic volatility and the transmission mechanism of oil price shocks.
The study shows: 1) In the RBC model the consumption will be divided into
durables and non-durables, which plays a crucial role in explaining Chinese
economic fluctuations. The core of the model is to improve the forecast of
consumption volatility and weak pro-cyclicality, which is closer to the actual
economy; 2) Oil price shocks mainly affect consumption volatility, but seldom
influence output, investment and labor, the three variables of which are
largely influenced by technology shocks; 3) The model reveals that the
transmission mechanism is determined by intra-temporal income effects and
inter-temporal effects of portfolio rebalanced between durable goods and
capital goods.