Energy Price Shock, Employment and Output

This paper analyzes the effects of energy price shock from a general equilibrium standpoint. We develop a dynamic stochastic general equilibrium (DSGE) model for the China economy. The model explicitly includes energy in the technology used by domestic firms. By using the quarterly data of 1996-2005 in China, we argue the model is an ideal framework for Chinese energy problem analysis. With the model we simulate how economy would respond to an energy price shock. We show that an increase in the real price of energy leads to a fall in output and the price change effect of energy will cause substitution effect between labor and energy use.