Regulation of Petrol and Diesel Prices and their Effects on GDP Growth: Evidence from China

This paper presents estimates of the effects that government regulation of diesel and petrol prices has on
GDP growth. Theory suggests that when supply curves are convex, a decrease in the regulatory price has
a larger effect on output than a tantamount increase. Motivated by this theoretical insight, we specify VAR
models with asymmetric effects of positive and negative changes in the regulatory prices of diesel and
petrol. We estimate the VAR models on quarterly data from China’s national accounts during the period
Q1 1998 to Q4 2018. Our main findings are that: (i) negative growth rates of regulatory diesel and petrol
prices significantly reduce GDP growth; (ii) positive growth rates of regulatory diesel and petrol prices have
a positive, but quantitatively small and statistically insignificant effect on GDP growth.