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Motivated by the facts that the sharp volatility in international oil prices has become one of the important external sources in driving China’s economic fluctuations, and in view of the strong correlation between oil and consumer durables, we build a real business cycle (RBC) model incorporating durable goods consumption in the context of oil price shocks. Using quarterly data on Chinese economy to conduct an empirical test, we examine China’s cycle characteristics of macroeconomic volatility and the transmission mechanism of oil price shocks. The study shows: 1) In the RBC model the consumption will be divided into durables and non-durables, which plays a crucial role in explaining Chinese economic fluctuations. The core of the model is to improve the forecast of consumption volatility and weak pro-cyclicality, which is closer to the actual economy; 2) Oil price shocks mainly affect consumption volatility, but seldom influence output, investment and labor, the three variables of which are largely influenced by technology shocks; 3) The model reveals that the transmission mechanism is determined by intra-temporal income effects and inter-temporal effects of portfolio rebalanced between durable goods and capital goods.

Oil Price Shocks, Durables Consumption, and China’s Real Business Cycle