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On the China factor in the world oil market: A regime switching approach11We thank Hilde Bjørnland, Tatsuyoshi Okimoto, Ippei Fujiwara, Knut Aastveit, Leif Anders Thorsrud, Francesco Ravazzolo, Renee Fry-McKibbin, Warwick McKibbin and members of the workshop on Energy Economics hosted by the Free University of Bozen-Bolzano for their comments in the development of this research

Author

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  • Cross, Jamie L.
  • Hou, Chenghan
  • Nguyen, Bao H.

Abstract

We investigate the relationship between China's macroeconomic performance and the world oil market over the past two decades. Unlike existing studies, we allow for possible regime changes by utilizing a class of Markov-switching vector autoregression (MS-VAR) models. The model identifies key regime changes in the structural shocks when the oil market experiences low and high volatility. We find that demand shocks from China and the rest of the world have a larger impact on the real price of crude oil during periods of high volatility. Supply shocks, in contrast, have a large effect on the price in the low volatility regime. A similar state-dependent phenomenon is observed for the impact of oil price shocks on China economic activity, however the size of these responses is relatively small. Thus, despite China being a major player in international oil markets, we conclude that oil market shocks tend to have little impact on China's real GDP growth.

Suggested Citation

  • Cross, Jamie L. & Hou, Chenghan & Nguyen, Bao H., 2021. "On the China factor in the world oil market: A regime switching approach11We thank Hilde Bjørnland, Tatsuyoshi Okimoto, Ippei Fujiwara, Knut Aastveit, Leif Anders Thorsrud, Francesco Ravazzolo, Renee ," Energy Economics, Elsevier, vol. 95(C).
    • Handle: RePEc:eee:eneeco:v:95:y:2021:i:c:s0140988321000244
    DOI: 10.1016/j.eneco.2021.105119
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    More about this item

    Keywords

    Oil prices; China; Markov-switching VARs; Sign restrictions;
    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
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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