Inflationary Effect of Oil-Price Shocks in an Imperfect Market: A Partial Transmission Input-output Analysis

This paper aims to examine the impacts of oil-price shocks on China’s price levels. To that end, we develop a partial transmission input-output model that captures the uniqueness of the Chinese market. We hypothesize and simulate price control, market factors and technology substitution - the three main factors that restrict the functioning of a price pass-through mechanism during oil-price shocks. Using the models of both China and the U.S., we separate the impact of price control from those of other factors leading to China’s price stickiness under oil-price shocks. The results show a sharp contrast between China and the U.S., with price control in China significantly preventing oil-price shocks from spreading into its domestic inflation, especially in the short term. However, in order to strengthen the economy’s resilience to oil-price shocks, the paper suggests a gradual relaxing of price control in China.


Issue Date:
2011-03
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/102507
Total Pages:
44
JEL Codes:
Q43; Q41; Q48; O13; O53; P22; E31
Series Statement:
SD
29.2011




 Record created 2017-04-01, last modified 2017-08-26

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