Energy Prices and Aggregate Economic Activity: Evidence from China

With the strong recovery of world economy, world energy prices have increased dramatically since 2002. Because changes in energy prices are often seen as a trigger for inflation and recession, it is important to understand the effect of energy price shocks on aggregate economic activity in China. In this paper the author will study the energy prices-macroeconomy relationship by means of studying the impact of energy price shocks on both economic activity and consumer price indexes for China over the period 1995:1-2005:9. The results suggest that energy prices have a statistically significant effect on economic activity in the long run. Moreover, energy price increases and high volatility in energy prices may have a significant effect on inflation rates, the energy prices-consumer prices relationship appears to be more significant than the energy prices-economic growth relationship for China