Empirical Research On US Monetary Policy Transmission To China’s Output And Price

Monetary policy transmission mechanism is the core of monetary economics. With greater connection and inter-dependence between individual economies, cross-border transmission and spillover effect of monetary policy gained attention and became more complex. This paper aims to present the empirical study of spillover effect and transmission mechanism of US monetary policy on China’s output and price level, with emphasis on cross-border fund transmission channel and working mechanism.This paper gradually uncovers the essence following research logic of spillover effect→ transmission channel→working mechanism. Spillover effect describes the spillover and overall effect of US monetary policy on China’s output and price level; Transmission channel explores the means through which US monetary policy takes effects; Working mechanism analyzes how transmission channel finds its way to China’s output and price.First, empirical study presents an overall picture of spillover effect. US price-based expansionary monetary policy, with interest rate as representative variable, has positive spillover effect on China’s output with time lag. US quantitativeexpansionary monetary policy, with money supply as representative variable, also has positive spillover effect. Different type of expansionary policy has different effect on China’s price. For PPI, the trend is going down before rising up,and the difference only lies in the time lag. In contrast, price-based expansionary monetary policy leads to an increase in CPI while US quantitative expansionary monetary policy results in a rising trend in CPI after falling. Empirical study of subsample shows that the spillover effect of interest rate decreases, while the spillover effect of money supply increases during the QE period.Second, empirical study on international trading and capital flow indicates neither price-based nor quantitative US monetary shock strongly affects or provides robust explanation regarding these two main channels of international economic exchange. In context of China’s real situations, i.e. full convertibility under current account and partial control under capital account, some capital account fund flows in and out under the guise of current account. As a result, cross-border fund flow is analyzed to present a complete picture. Analysis finds US monetary policy has greater influence and provides stronger explanation with respect to this channel. Empirical study shows cross-border funds inflow results in higher level of output and price in China.Finally, the paper delves into the working mechanism of cross-border fund flow channel.As China’s exchange rate and interest rate are still partially controlled by the government, neither these two channels has played significant role in the transmission process. US price-based monetary policy provides sound explanation for interest rate spread, while quantitative policy greatly affects the difference between onshore and offshore RMB/US exchange rate.Exchange rate difference is the main factor driving cross-border fund flow, followed by interest rate spread.