Research On The Spillover Effects Of American Interest Rate Policy On China’s Economy

In recent years,with the deepening of the global economic integration process,the international economy and finance have formed an interconnected organic system.Com-modities and capital cross-border circulation have been accelerated,so that different coun-try’s monetary policy interact with each other,the spillover effect is obvious.The United States,as the world’s largest economy,dominates the global economy,and its monetary policy changes have an important impact on the economies of other countries in the world,in addition to influencing it’s economies.At the same time,in the current internation-al monetary system,the dollar is the most important reserve currency,so the Federal Reserve’s monetary policy has significant effect to other economies around the world.In December 16,2015,the US Federal Reserve Increased the federal funds rate by 25 basis pointst,the target interest rate will be remained between 0.25%to 0.50%,its monetary policy will turn from loose to tightening.After a lapse of one year,in December 15,2016,the Federal Reserve announced to raise the target rate of the federal funds between 0.5%and 0.75%,which is the result of the zero interest rate policy in the United States.In the context of global economic and financial integration,the Federal Reserve monetary policy adjustment is bound to have a profound impact on the world economy.This paper takes empirical analysis and theoretical analysis in a unified framework to study the spillover effect the America’s interest rate policy to China’s economy.Through the analysis of the historical experience and empirical analysis of the VAR model,We get,the experience of the impact of China’s economic to the America’s interest rate poli-cy.Then,according to the empirical analysis and the characteristics of China’s economy,we build a new open economy dynamic stochastic general(NOE-DSGE)model to s-tudy the effect of the fed to raise interest rates on China’s economy and its transmission mechanism.From January 1990 to December 2008,the United States generally experienced three rounds of full interest rate cycles:January 1994 to November 1998 interest rate cycle,July 1999-June 2003 interest rate cycle,2004 April-November 2008 Interest rate cycle.Since the 1990s,the Fed has experienced four rate hiking process.The Federal Reserve rate hiking process began in the economic stabilization recovery,the employment situation gradually improved,the employment rate performed well,the inflation rate began to rise and exceeded the target inflation rate(the critical point is usually 2%),and accompanied by a strong trend.When the economy is cooled by overheating,inflation expectations tend to be reasonable,and the inflation rate is falling,the rate hiking cycle is over.With the gradual opening of China’s economy,the impact of the US interest rate policy on China’s economy became more complex.Empirical analysis based on vector autoregressive(VAR)model shows that the federal funds rate is rising under the positive impact of a standard deviation of US interest rate,the effect is more significant and the duration is longer.Domestic interest rates continued to rise,but compared with the federal funds rate,the domestic interest rate changes smaller,with shorter duration.The impact of the federal funds interest rate on the Chinese output in the short term have a strong positive spillover effect,in the medium term have a negative spillover effect,and in the long term have little spillover effect.In the short term there have been more serious inflation effect,the RMB nominal exchange rate in the short term have a significant depreciation trend,the latter part of the emergence of a slight appreciation trend.The official foreign exchange reserves appear a temporary downward trend,indicating that the monetary authorities exchange rate policy is the"windward" intervention.The domestic money supply in the short term decline slightly,and then began to rise to the positive level,indicating that the central bank exchange rate intervention policy is the "non-write-off" type,so exchange rate intervention makes foreign exchange accounts at the same time change.International oil prices rose sharply in the short term,and then gradually fall;after the Federal Reserve to raise interest rates,the supply costs increased,the domestic inflationary pressures increased.Based on the above characteristics and the characteristics of China’s economic and monetary policy practice,this paper constructs a new open economy stochastic general equilibrium(NOE-DSGE)model to study the impact of the Federal Reserve interest rate increasing on China’s economy and its transmission mechanism.The innovation of this paper lies in the inclusion of cross-border capital flow controling in the benchmark theoretical model,the financial friction in the real economy and the financial sector,and the introduction of two types of financial accelerators.At the same time,based on the fact that the central bank has continuously entered the foreign exchange market to intervene directly on the exchange rate changes,resulting in the increasing foreign exchange share,this paper embeds the monetary authority’s balance sheet into the model dynamic system,depicting this important characteristic.In addition,according to China’s current monetary policy,by using of quantitative monetary policy rules,and containing the exchange rate target(or exchange rate target range),the monetary authorities can maintain exchange rate stability by indirect intervention.We first,solved the above new open economy dynamic stochastic general equilibrium(NOE-DSGE)model,and then got the values of the model parameters by calibration and bayesian estimation.At last,through numerical simulation,We analyzed the impact of the federal reserve to raise interest rates on China’s economy and its transmission mechanism.By comparing the theoretical model with the VAR model,the variables of US interest rate,China interest rate,gross domestic product,money supply,price level,foreign exchange reserve and RMB exchange rate are based on the empirical analysis of VAR model and the dynamic stochastic equilibrium,the results of the theoretical analysis of the model are consistent,indicating that the characteristics of the facts and the theoretical model has a strong self-consistency,in order to achieve the empirical analysis and theoretical analysis of a high degree of unity.Within a unified model framework,we assess the various monetary policy rules and their welfare performance.In general,if the central bank implements a quantitative monetary policy,the McCallum rule with the real exchange rate target is best,followed by McCallum’s unalved exchange rate target,and then the McCallum rule pegged to the nominal exchange rate target range;if the central bank implements the interest rate Policy,Taylor rules staring at exchange rate target is the optimal,followed by Taylor not pegged to the exchange rate target,and then Taylor rules pegged to the nominal exchange rate target range.Under the current willingness to sell foreign exchange system,the quantitative monetary policy rule(McCallum rule)is superior to the interest rate policy rule(Taylor rule)if the quantitative monetary policy and the target monetary policy contain the same target variable.Under the "Tibet" system,if the quantitative monetary policy and the price-type monetary policy contains the same target variable,the price-based monetary policy rules(Taylor rules)is superior to the quantitative monetary policy rules(McCallum rules).The key to coping with the Fed’s rate hike is to improve the ability to respond to external shocks by fully deepening the endogenous drivers of economic growth and by maintaining monetary policy and exchange rate policy flexibility.The central bank should raise the transparency of monetary policy,stabilize expectations,rationalize the transmission mechanism of monetary policy:improve the flexibility of RMB exchange rate,build cross-border capital flow monitoring and early warning index system,improve the capital control system.The Fed began to raise interest rates,there will be short-term capital outflow phenomenon.In the major economies,monetary policy may conflict with each other,this may bring great risks to the Chinese economy.The central bank should maintain communication with the Federal Reserve,build a risk firewall and properly and then set the Path and Rhythm of Financial Reform.The central bank should improve the formation mechanism of RMB exchange rate.For China,such a big country,from a long-term strategy,the free floating is undoubtedly the most appropriate exchange rate formation mechanism.In the excess stage,the more appropriate exchange rate system should be pegged to the effective exchange rate of RMB in a wide range of fluctuation-s,because this system can balance the flexibility and stability of the RMB exchange rate.The central bank should reduce the size of international reserves and the amount of foreign exchange,and reduce the frequency of direct intervention to alleviate the central bank’s balance sheet on its monetary policy operation of the clamping effect.In the current period,the quantitative monetary policy still has its theoretical basis and realistic ba-sis;to achieve from the quantitative monetary policy to the gradual transformation of the price-based monetary policy is a preferable choice.Monetary authorities can still use quantitative monetary policy,at the same time,it should began to build price-based controling of the benchmark interest rate system.