China’s government spending and global inflation dynamics: The role of the oil price channel

This paper explores the international spillover effects of China’s government spending onto global inflation dynamics and the role of the oil price channel in the transmission process based on a monthly dataset covering 20 OECD economies spanning from January 2000 to September 2021. Based on the estimation results of Large Bayesian VAR models this paper provides three novel findings to the literature. Firstly, China’s government spending expansion significantly raises the CPI of most OECD economies. Secondly, the oil price rises significantly in response to China’s government spending expansion and magnifies its spillover effect on global CPI inflation. Thirdly, the effect of the oil price channel on the international transmission of China’s government spending to the global inflation dynamics crucially depends on the oil import dependence rate and the energy subsidies of the shock recipient countries.