Regulation of Fuel Prices and GDP Growth: Evidence from China

Abstract

When supply curves are convex, a decrease in the regulatory fuel price has a larger effect on GDP than a tantamount increase. Based on this insight, we specify VAR models with asymmetric effects of positive and negative growth rates of regulatory fuel prices. We estimate the VAR models on quarterly data from China’s national accounts during the period Q1 1998 to Q4 2018. Impulse response functions show that a shock to a negative growth rate of the regulatory fuel price has a larger effect on GDP growth than a shock to a positive growth rate of the regulatory fuel price.

Keywords: GDP growth, energy prices, regulation