Oil Price Pass-Through Into Consumer and Producer Prices With Monetary Policy in China: Are There Non-linear and Mediating Effects

Abstract

Balancing the oil pass-through to consumer and producer prices is crucial for policymakers. This study aimed to advance associated thinking by examining how consumer and producer prices in China related to changes in global oil prices from 2006 to 2018. First, we investigated the pass-through of oil spot prices to consumer prices as indicated by the consumer price index (CPI) and means of consumption price index (MCPI), and to producer prices as indicated by the producer price index (PPI) and means of production price index (MPPI), with a monetary policy in China. This study also explored the non-linear and mediating effects of financial markets and government debt on linkages between oil prices and consumer/producer prices based on non-linear framework and causal steps approach, respectively. Our findings indicated some key points; for example, the pass-through of oil prices with a monetary policy in China shed light on a benchmark role in global oil markets. Additionally, the non-linear effect of oil prices on consumer/producer prices varied across the Brent and West Texas Intermediate (WTI) crude oil markets. The mediating effect of government debt also reflected the effectiveness in balancing the relationship between oil prices and producer prices. Government debt explained the −0.091 transition between the Brent oil price and the PPI and could explain the −0.095 transition between the Brent oil price and the MPPI, whereas the transition due to financial markets were −0.064 and −0.080, respectively. These outcomes have important implications for stabilizing price levels in countries.

Identifying the Asymmetric Channel of Crude Oil Risk Pass-Through to Macro Economy: Based on Crude Oil Attributes

“…The external environment mainly includes two aspects: industrial structure adjustment and monetary policy adjustment. The effect of crude oil price fluctuations on industrial structure adjustment is mainly due to the difference in oil dependence, and the adjustment of resource allocation is cyclical to a certain extent, which eventually increases the burden of economic self-regulation (Chen et al, 2020). The effect of monetary policy adjustment is also affected by the risk of the crude oil market (Wen et al, 2019b).…”

“…The results show that before the financial crisis, the mediating effect of currency is not obvious, but after the financial crisis, the price of crude oil will not only directly affect the price level, but also have an indirect effect on the price level through currency. In addition, the interaction mechanism between crude oil price and price level can also be realized through other channels, such as the channel of interest rate level (Smets and Peersman, 2001;Tillmann, 2008;Kose et al, 2012), the channel of credit level (Wulandari, 2012), the mediating effect of exchange rate market (Takhtamanova, 2010), and the mediating effect of stock price (Gregoriou and Kontonikas, 2010;Nistico, 2012;Chen et al, 2020). Sek (2017) analyzed the channel role of crude oil export price and production cost in the relationship between crude oil price and price level.…”

“…Sek (2019) further analyzed the heterogeneity of the indirect effect of crude oil price on price level between crude oil exporting and importing countries. Chen et al (2020) studied the impact mechanism of Brent (WTI) crude oil price on CPI/PPI. The results show that Brent has a significant negative indirect impact on CPI, PPI and MPPI, while the financial market has no channel effect in the impact of WTI crude oil price on the price level.…”

Dynamic Characteristics of Oil Attributes and Their Market Effects

“…Due to the integrated development of economy and finance, this impact gradually spilled over to the commodity market and has affected the smooth operation of the economy. In response to such shocks, various countries use monetary policy and other policy tools by maintaining investor confidence in the market and smooth economic operation, stimulating consumer demand, and mitigating the impact of the crisis on the market to the greatest extent [49]. At the beginning of 2020, the outbreak of the pandemic posed new challenges to the effectiveness of the global health system.…”

Asymmetry of Risk Evolution in Crude Oil Market: From the Perspective of Dual Attributes of Oil

“…Due to the development of economic and financial integration, the impact gradually spilled into the commodity market and affected the smooth operation of the economy. Countries use policy tools such as monetary policies to maintain the confidence of investors in the market and the smooth operation of the economy to stimulate consumers demand and minimize the impact of the crisis on the market [55]. Early in 2020, the outbreak of the COVID-19 epidemic posed new challenges to the effectiveness of the global health system.…”