Research On The Spillover Effect Of American Quantitative Easing Monetary Policy On The Economy Of China

In recent years, the spillover effect of American quantitative easing monetary policy(American QE) on the world has been attached increasing academic attention. Both as the world’s largest economies, China and the US are connected by close economic and trade exchanges,so that the research of the spillover effect of American QE on China’s economy has been a top priority in the current study. However, research on monetary policy spillovers, transmission mechanisms and economic influence is far from concluded. Therefore, this thesis makes efforts to sort out the comprehensive transmission channels of American QE and study into the spillover effects on China with comprehensive use of a variety of approaches.Firstly, this thesis reviews the research literatures systematically from the aspects of the theoretical basis, transmission channels, economic effects and empirical research methods of the monetary policy spillovers. It is found that the explanatory power and the depth of research are not enough, while the research perspectives and approaches are limited in the existing literature. Then it comes up with the research ideas and framework of this thesis.Secondly, this thesis gives definitions of two important concepts of the QE and the spillover effect of monetary policy. Then, the four international transmission channels of monetary policy spillovers are analyzed from Mundell-Fleming Model, Dornbusch Overshooting Model, the new open economy macroeconomics and basic theory of international economic policy coordination, that are the transmission channels of exchange rate, interest rate, income and different pricing currency channels. Then it illuminates that the spillover effect of American QE is through the channels of the exchange rate, the interest rate, US income and international commodity prices. Then it studies the impact mechanisms of American QE on prices, international trades, international capital flows and outputs of China.Thirdly, employing the econometric techniques of SVAR model, ARDL and panel data analysis with FGLS, fixed effects and GMM approaches, this thesis conducts the in-depth empirical analyses of the spillover effects of American QE on China’s prices, trades, international capital flows and output s, including overall spillover effects, industrial spillover effects and spillover effects with cross-country comparisons respectively. It is shown that:(1) American QE depresses the overall price level in China, including CPI, PPI and IPI in China. Through the channel of exchange rate it has a more significant negative impact than the positive impacts through the channels of interest rate and international commodity prices on the prices of China. The results based on industrial analysis show that, through the channel of exchange rate, American QE has the most significant negative impact on the prices of capital-intensive industries in China.(2) in the short term, American QE does harm to the international trade in China, while, in the long run, it does good to export in China significantly. In addition, its impact on Sino-US bilateral trade is insignificant. Through the channel of exchange rate it has more significant negative impact on the export of China than the positive impacts through the channels of US income. Through the channel of international commodity prices, it decreases export while increases import of China.(3) American QE causes the volatility of short-term international capital flows of China on the increase. Short-term international capital flows are very sensitive to exchange rates as well as the exchange rate expectations. Overall, it makes contributions to attract FDI inflows of China. To be specific, it increases market-oriented FDI inflows, while decreasing the resource-oriented FDI inflows. However, through the both channels of exchange rate and interest rate, it has more significant impact on short-term international capital flows than on FDI inflows. Additionally, through the channels of exchange rate, it has significant positive impact on China’s FDI outflows.(4) American QE has more significant positive impact through the approach of FDI inflows than through the approach of price on the output of China, while it has positive but not significant impact on t he output of China through the approach of trade and short-term international capital flows. Results based on industrial empirical analysis show that it promotes the i ndustrial added value in China. However, it brings significant negative impacts differently on the growth rates of industrial added value in different industries in China. Moreover, it exerts different influence on different industries. The results show that, through the paths of price and trade, America quantitative easing monetary policy has a significant negative impact on the outputs of labor-intensive industries in China, while it brings less significant negative impact through the path of price on the outputs of capital-intensive industries in China, by contrast with the significant positive impact through the path of trade on the outputs of technology-intensive industries in China.Furthermore, taking into account the fact that the previous studies are based on partial equilibrium perspectives and post hoc tests, it is difficult to get the outlook on the comprehensive spillover effects of American QE on the transformation of the overall economic environments as well as microeconomic developments of the industries in China. Therefore, further analysis is made with the use of the extended version of computable general equilibrium model, depicting the behavior s of financial markets, reflecting the Sino-US economic relations to study the overall spillover effects of American quantitative easing monetary policy on the changes in the economic environments in China.Empirical results show that: in the macroeconomic view, in the short term, American QE mainly affects the labor market and international trade of China. To be specific, it causes significant fluctuations in China’s international trade. Still maintaining a trade surplus trend, but China is going slow in the growth speed of international trade with the impulse of looking for new overseas markets or expanding domestic demand. While in the long run, its main impact on the Chinese economy comes from shocks in the capital market. It will increase the amount of capit al flowing into China to some extent, leading to imported inflation( increased CPI). At the same time, it also increases risks and uncertainties in the investment market(e.g. some investment reflux, attempts to find other overseas markets). In the industrial views, industries are affected differently under the changed macroeconomic economic environments by American QE. On the whole, affected by American QE, China’s industrial structure, especially the trade structure will change. It will lead to impaired export enterprises in the short term, while in the long run it will help improve the competitiveness and capabilities of export enterprises.Finally, this thesis makes a summary of main findings. Then based on the results of previous studies, it puts forward policy proposals from the perspectives of four transmission channels of spillover effect as well as the perspectives of industrial variance. After that, it presents proposals for further research.