A Multivariate Nonlinear Analysis of China’s GDP and World Oil Price and Its Implications

Abstract

Abstract This paper reviews the relationship between China’s GDP and world oil price in recent decades to investigate whether the growth and evolution of the Chinese economy have a significant impact on the global oil market and to measure to what extent oil shocks affect China’s economy. To this end, we propose a multivariate threshold autoregressive model for the two time series and study the associated nonlinear impulse response functions. We also contrast the implications of the nonlinear model with those of the linear model and other alternative specifications. Our findings show certain strong nonlinear effects between China’s GDP and the oil sector. In particular, our nonlinear VAR model points to the presence of nonlinear causality effects when oil price declines, suggesting further evidence of asymmetrical interactions. Our results help to clarify previous studies on the effects of lead-lag between oil price and the real economy as a whole and China in particular. Our findings appear to be in line with Hamilton’s (1983. “Oil and the Macroeconomy Since World War II.” Journal of Political Economy 91 (2): 228–48) work, which points to significant nonlinearity in this relationship. In addition, our On/Off Threshold VAR model allows us to reproduce the time-varying relationship between oil price and China’s GDP.