Three channels of monetary policy international transmission: Identifying spillover effects from the US to China

Mi Zhang, Ahmet Sensoy, Feiyang Cheng, Xuankai Zhao*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

6 Citations (Scopus)

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.

Original languageEnglish
Article number101670
Pages (from-to)1-18
Number of pages18
JournalResearch in International Business and Finance
Volume61
DOIs
Publication statusPublished - Oct 2022

Keywords

  • China
  • Financial transmission channel
  • Proxy VAR model
  • Spillovers
  • US monetary policy

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