Abstract: Oil is introduced into the dynamic stochastic general equilibrium model as a product con-sumed by households and an input used by intermediate firms. With the model estimated by Bayesianmethod based on mixed-frequency data, this paper explores the detailed transmission mechanism of oilprice shocks and oil consumption preference shocks. The theoretical analysis reflects that high oil priceraises the marginal cost of production, and thus triggers cost-driven inflation in the short term and leadsto a decline in output in the medium term, resulting in a negative impact on China's macro-economy.Therefore, to alleviate the negative impact caused by oil price shocks, China's oil dependence should bedecrease by enhancing the elasticity of substitution among inputs of production. In addition, the posi-tive oil consumption preference shocks not only affect households' consumption and investment, but alsostimulate the output by expanding aggregate demand. Considering that the oil consumption preferencestill has a positive on economic growth, the government in China should keep a balance among the energy,environment and the economy when promoting the economic green development.

Keywords: oil dependency; mixed frequency data; Bayesian estimation