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On the China factor in the world oil market: A regime switching approach

Cross, JL, Hou, CH and Nguyen, BH ORCID: 0000-0002-0563-5158 2021 , 'On the China factor in the world oil market: A regime switching approach' , Energy Economics, vol. 95 , pp. 1-13 , doi: 10.1016/j.eneco.2021.105119.

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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.

Item Type: Article
Authors/Creators:Cross, JL and Hou, CH and Nguyen, BH
Keywords: China, oil prices, MSVAR, Markov-switching VARs, sign restrictions
Journal or Publication Title: Energy Economics
Publisher: Elsevier Science Bv
ISSN: 0140-9883
DOI / ID Number: 10.1016/j.eneco.2021.105119
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© 2021 Elsevier B.V. All rights reserved

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