Inflationary effect of oil-price shocks in an imperfect market : a partial transmission input-output analysis

Abstract

This paper aims to examine the impacts of oil-price shocks on China's price levels. To that end, a partial transmission input-output model was developed to capture the uniqueness of the Chinese market. 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--were hypothesized and simulated. Using the models of both China and the U.S., the impact of price control was separated 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.