Measuring The Spillover Effects Of U.S. Monetary Policy On China

As the connections between world economies become closer, China’s economy has endured more tests from world economic situation. As the world largest economy, America’s adjustments of monetary policy will be bound to effects to the rest economies of the world. After the outbreak of the world financial crisis, the Federal Reserve implemented a series of unconventional monetary policies to stimulate the soft economy. Although these policies successfully help the economy recovery and alleviate the unemployment rate, they also put considerable pressure on the exchange rate of the other economies and the financial market. America’s economy is now experiencing an upturn, so the monetary policy of the Federal Reserve is being gradually normalized and a new round of interest-rate increase has been started, which again causes a strong impact on the world economy. Different economic sectors and macro policies continue to divide. The exchange rates of most economies to dollar are showing different degrees of depreciation, among which the emerging economy currency is generally suffering significant depreciation. Comparatively speaking, our country has suffered a relatively limited impact and maintains a rapid growth in the trend. But facing the complicated world economy situation and the uncertainty of the rhythm and the strength of the monetary policy normalized, our country is still facing many risks and challenges. Therefore we should solve these urgent problems that whether the spillovers of U.S. monetary policy will impact our economy and that of the channels of the transmission mechanism. Based on the above consideration, research content and brief conclusions of this article are as follows:(1) Verify the Fed monetary policy‘s spillover effects on the short-term cross-border capital of our country. It is tested and verified the nonlinearity of the short-term cross-border, and the first-lag of interest differentials is the transform variable. Then verify the form of conversion functions as logical type. At last, estimate by utilizing LSTR model and obtain regression results and threshold value. When Sino-US interest margin exceeds the threshold value to 0.65%, the impact effect of exchange rate and interest margin shows the feature of enhancement. However the intensify change of the impact effect of the Fed‘s loose monetary policy is not significant and continues to become shorter. PMI influence does appear mechanism change and meanwhile its impact effect on cross-border capital flow stands out significantly. Therefore while the Fed implementing quantitative easing policy, the amplitude of our short-term cross border capital flow appear to be more stable than that of other economy in spite of the substantial increase of Sino-US interest margin. It is resulted from our relatively stable macro fundamentals and the dollar peg, foreign exchange control and macro-prudence. After the normalization of monetary policy, the interest margin decreases gradually and will eventually return to around the threshold value. We can cut reserve and interest rate to further stimulate our economy recovery. We can also constantly complete marketization of exchange rate and enlarge the exchange rate volatility to restrain the sharp external flow of our short-term cross-border capital.(2) Utilize the LT-TVP-VAR model to research on the channels and impacts of the Fed scalar type monetary and price type monetary policies on our economic growth and inflation. As the federal funds rate will lose its significance under the environment of zero lower bound, the SRTSM model is built to estimate the Fed Shadow rate of interest rate as the price type monetary policy. The Fed balance sheet is utilized as index for the scalar type monetary policy. It is concluded that the Fed looseness has positive spillovers on our growth, but it has also intensified our inflation. It is verified by comparing that the scalar type monetary policy has an much more outstanding effect on our growth. Therefore we should pay more attention to the impacts of the Fed balance sheet shrink than the impacts of the interest increase on our growth and inflation. Meanwhile by making a comparative study on the impact effects of exchange rate, interest rate and trade, we find that the Fed tight monetary policy reduces our interest rate and real effective exchange rate level. Meanwhile it cuts down our net export by the contrary spending conversion effect and absorption effect. The trade channel has suffered the most notable impact. This article also utilizes(E)GARH and TVECM model to realize and verify the features and mutual relations between the channels.(3) VAR model is utilized to research on the bulk commodity price‘s effect on our price level. Based on the Philip curve in the open economy, the exogenous shocks in bulk commodity price and exchange rate have been joined to the Philip curve to build positivism model. Macroeconomic variable output is quarterly date, which has difference with other variable frequencies. Therefore MF-VAR model is utilized to avoid information loss and error during frequency conversion. It is concluded that the commodity price rise after the financial crisis has promoting effects on our CPI and PPI, among which the effects on he PPI is much more significant. The fluctuation of the RMB effective exchange rate has negative effects on our price level. Now our CPI is under 2%, our PPI is negative for 3 consecutive years and our deflation continues to rise. Therefore the time lag of the bulk commodity price‘s impact on the price could be utilized to build detection and warning mechanism to avoid wide price fluctuation.(4) Utilize SVAR、MS-VAR and DCC-GARCH model to estimate and test the conduction channel and the Fed monetary policy spillovers on our asset price. Utilize the model estimation dynamic correlation coefficient of Sino-US stock market to verify that monetary policy can conduct through stock market linkage channels. Utilize MS-VAR model to verify that the Fed monetary policy could impact on our asset price by influencing on the correlation level of Sino-US stock market. Although the spillover effect of the Fed monetary policy before and after the crisis on the Sino-US stock market has changed, the Sino-US stock market are still suffering the influence of US monetary policy when the global economic environment becomes smooth and stable. During the outbreak of the financial crisis, the effect of Fed monetary policy disappeared, which illustrated that the monetary policy adjustment of our country to avoid the stock market volatility was effective and feasible. SVAR model is utilized to concretely analyze the spillover effect. The effect of the US monetary aggregates adjustment on the stock returns of our country is relatively weak. The Fed found rate increase promoted our stock market at sight, but later it turned into negative influence. As for the aspect of real estate price, the impact position of US monetary policy is the same as that of our monetary policy, but it is relatively small. When restraining the spillover effects of the US monetary policy on our real estate price, we should sufficiently consider the chronicity and variability of the impact. The impact effect of the US monetary policy on the real estate market is much more prominent, complicated and longer.(5) 30 economic variables are chosen to build the financial condition index of our country and to test the effectiveness of this index based on the monetary policy, asset price and macro-economy of TVP-FAVAR model. The article also carries on an empirical study on the spillover effects of U.S. monetary policy on FCI of our country by using TVP-VAR model and by utilizing potential interest margin and nominal interest margin as Fed unconventional monetary policy and conventional monetary policy. First of all, utilize the interval shock response as a whole to analyze the different U.S. monetary policy‘s effects on our financial market during short term, interim and long term, which verifies the marked difference of the US unconventional monetary policy and conventional policy effect on our financial market during period of the quantitative easing policy. Then this article carries on a further research on these special time points. After the exit from the quantitative monetary policy, conventional monetary policy had significant negative influence on our financial market at sight. However, the Fed unconventional monetary policy had relatively weak positive influence on our financial market. By summarizing the effect of Fed tapering of quantitative easing policy on our financial economy and comparing historical spilover effects of Fed interest rate increase, this article considers that although RMB exchange rate is facing pressure, the entity economy still appears to be stable, low level of debt ratio and relatively high foreign exchange reserve are capable to cope with the impact of interest increase. This round of interest increase has a certain impact on our financial market, but the probability of the extreme volatility of the overall market is quite small.Through the above empirical analysis, this paper studied the transmission mechanisms and spillover effects of U.S. monetary policy on China’s economy from different angles. And Considering the current complex global economic environment and China’s macroeconomic characteristics, the paper proposed some relative strategic suggestions from different transmissions to mitigate impacts of Fed’s new round of rate-rise cycle and policy uncertainty on our economy, and tack risk.