Three channels of monetary policy international transmission: Identifying spillover effects from the US to China
Date
2022-05-02Source Title
Research in International Business and Finance
Print ISSN
0275-5319
Electronic ISSN
1878-3384
Publisher
Elsevier Inc.
Volume
61
Pages
101670- 1 - 101670- 18
Language
English
Type
ArticleItem Usage Stats
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Abstract
We identify and compare three channels through which the adjustment of US monetary policy spills over into China, including trade, exchange rate, and financial channels. A proxy vector autoregression model, with a high-frequency identification strategy, is applied to measure the causal effect of monetary policy shocks to the fundamentals of China’s economy. The analysis reveals that tightness in US monetary policy increases inflation in China by 0.2% and drives down output by 1%. We also find that the spillover effect from the US to China is immediate and significant through each of the three channels. Furthermore, the financial channel is significant in terms of its effect on interest rate expectations and long-term financing premia for Chinese companies. Our results support the notion of the financial channel as a key transmission mechanism for cross-country spillovers of monetary policy, which should be of much interest to participants in financial markets.