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The Transmission Mechanisms and Impacts of Oil Price Fluctuations: Evidence from DSGE Model

Author

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  • Bei Zhang

    (College of Economics and Management, Beijing University of Technology, Beijing 100124, China)

  • Xiaoqing Ai

    (College of Economics and Management, Beijing University of Technology, Beijing 100124, China)

  • Xingming Fang

    (School of Economics, Southwest University of Finance and Economics, Chengdu 611130, China)

  • Shi Chen

    (School of Economics, Southwest University of Finance and Economics, Chengdu 611130, China)

Abstract

This paper constructs an open economy dynamic stochastic general equilibrium (DSGE) model with oil to investigate the transmission mechanism and impact effects of oil price fluctuations driven by different factors on China’s macroeconomy using quarterly data from 1996 to 2019. The results show that the international crude oil supply-driven oil price decline promotes positive output growth in the short run through the positive cost effect of the supply channel, and the production regulation cost will dampen the incentive to invest in the new energy sector in the long run. Domestic economic development demand-driven oil price increases act on the demand channel, driving output and oil prices to fluctuate in the same direction, generating a negative real balance effect on the economy through the interest rate channel. The oil-specific demand driven by foreign nominal interest rate shocks is transmitted through the exchange rate channel, triggering imported inflation, lower aggregate demand, and lower output. Different sources of oil price fluctuations have different transmission mechanisms and thus differential effects. For this reason, based on the root causes of oil price fluctuations, policy recommendations to deal with international oil price fluctuations in the new situation are proposed at the supply level, demand level, and international level.

Suggested Citation

  • Bei Zhang & Xiaoqing Ai & Xingming Fang & Shi Chen, 2022. "The Transmission Mechanisms and Impacts of Oil Price Fluctuations: Evidence from DSGE Model," Energies, MDPI, vol. 15(16), pages 1-20, August.
    • Handle: RePEc:gam:jeners:v:15:y:2022:i:16:p:6038-:d:893216
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