On the China factor in international oil markets: A regime switching approach

In the new CAMP working paper 11/2018, Cross, Hou and Nguyen investigate the relationship between world oil markets and China’s macroeconomic performance over the past two decades.

They start their analysis by proposing a simple method for disentangling real economic activity stemming from China and the rest of the world. Thereafter, they consider a sufficiently large set of dynamic VAR models to distinguish between abrupt and gradual changes in the macroeconomic relationships and volatility clustering in the shocks.

When investigating the role of oil market shocks on China’s output, they find that oil supply shocks tend to elicit a positive response, while the response of oil demand shock is negative. Further, when analysing world oil price dynamics, they find that demand shocks have had significant positive impacts over the past two decades.

Finally, their findings indicate that the recent 2014/15 oil price drop was due to a combination of increased oil supply and decreased demand from China.

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