TY - JOUR
T1 - Three channels of monetary policy international transmission
T2 - Identifying spillover effects from the US to China
AU - Zhang, Mi
AU - Sensoy, Ahmet
AU - Cheng, Feiyang
AU - Zhao, Xuankai
PY - 2022/10
Y1 - 2022/10
N2 - 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.
AB - 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.
KW - China
KW - Financial transmission channel
KW - Proxy VAR model
KW - Spillovers
KW - US monetary policy
UR - http://www.scopus.com/inward/record.url?scp=85129472698&partnerID=8YFLogxK
U2 - 10.1016/j.ribaf.2022.101670
DO - 10.1016/j.ribaf.2022.101670
M3 - Article
AN - SCOPUS:85129472698
SN - 0275-5319
VL - 61
SP - 1
EP - 18
JO - Research in International Business and Finance
JF - Research in International Business and Finance
M1 - 101670
ER -