Empirical Study Of The U.S. Monetary Policy Spillover Effects On China’s Economy

The U.S. dollar in the international monetary system is leadership, domination and dominantposition. The dollar’s dominance led to two contradictory: First, the United States in order tomaintain the dollar’s international status, merchandise sales sites for other countries, to maintainthe balance of payments deficit to provide dollar liquidity for the international monetary system.But the sustained international deficit in the United States will result in a global economicimbalances, weakened confidence in the dollar and the U.S. balance-of-payments crisis, which ledto the decline of the status of the U.S. dollar in the international monetary system. From thepost-World War II history, every time the status of the dollar in times of crisis, the world economywill take place a big adjustment. Second, the economy of the United States itself is one of themain objectives of U.S. monetary policy services, and the dollar is a global currency, which couldaffect the global economy. When there are differences between the two, the United States willchoose the former, and thus cause spillover effects on the economies of other countries. The firstaspect of the problem includes the study of global economic imbalances, the "new Bretton Woodssystem, crisis theory, the dollar external seigniorage. The second aspect of the study includes thespillover effects of U.S. monetary policy adjustment of other countries, capital flows, interest rates,exchange rates, inflation, output and other macroeconomic indicators. This article studied thespillover effects of U.S. monetary policy adjustment on the China’s economy. Traditionalmonetary policy based on the traditional target rate adjustment as the main instrument, thespillover effects of Fed’s target interest rate adjustments on the China’s economy are the mainresearch content. Spillover effects of the Fed’s quantitative easing monetary policy followed theU.S. subprime mortgage crisis in2008after the outbreak will be analyzed in Chapter7.As the U.S. dollar is a global commodity pricing and transaction currency, and commoditiesfutures exchange in the United States, market participants are mostly developed countries capital.Therefore, the adjustments of the U.S. dollar interest rates have a strong impact on commodityprices. With economic development, China’s economy dependents on international commodityimports. Therefore, we first use the model of the cointegration VAR model (Cointergration VAR),to analyze the Fed’s target rate adjustments effect on the price level in China through the impact of international commodity price index. The empirical results show that the Fed’s target interest rates,the commodity prices, raw materials, fuel and power purchase price index, PPI have the long-termcointegration relationship. Federal Reserve monetary policy adjustments will affect internationalcommodity prices, thus affecting our raw materials, fuel and power purchase prices, then affectingChina’s PPI index. There is a negative relationship between the Fed’s target rate and raw materials,fuel and power purchase price, and the producer price index PPI.The flow of international capital is interested by economist. Because of the relatively stableexchange rate of the RMB to the U.S. dollar, China is easier to be attacked by large flows ofcapital caused by other countries’monetary policy adjustments. This paper analyzed the impact ofnon-trade and FDI capital flows of the main factors, and found that RMB expected investmentyield is the main influencing factors of China’s capital flows. The main indicator is the U.S.interest rate which affects the expected return of investment rate of the RMB and RMB expectedexchange rate. Using the empirical results, dollar interest rate adjustments will affect the U.S.dollar index and U.S. interest rate, the dollar index caused by changes in the RMB exchangedifferences is expected yield of U.S. interest rate and the dollar index RMB expected investmentyield. RMB expected investment yield is the main factor to affect the RMB capital inflows.Therefore, changes in U.S. dollar interest rates will lead to changes in non-trade and FDI capitalinflows. When the U.S. dollar interest rates at a low level, there is a large number of non-trade andcapital inflows of FDI into China.Inflation passes through countries which can cause changes in the price level in China,whether it is through the international commodity prices or capital flows. This paper studied theinternational inflation conduction. The empirical results show that CPIs in different country havelong run cointegration relationship. International inflation conduction in December1995, April1999, March2004, and August2007has four structural break points, and the whole sample periodis divided into five sub-intervals. Overall, International inflation conduction is graduallystrengthened. China did not suffer the international inflation conduction more than Japan andGerman, which is under float exchange rate. The empirical results contracted with the predictionof the traditional economic theory, the exchange rate is not the decisive factor of the impact ofinflation conduction. As the relationship between China and the others become closer, the inflationof China influence others’more and it also can be influenced more easily.The Fed’s target rate adjustment there is a wide range of effects on China’s financial markets. This effect relies on the Fed’s report of future economic conditions change, and also from changesin capital flows and the monetary policy adjustment. The efficient market theory assumes that anefficient financial market should have been fully digested all the information currently on themarket. We used the method of Kunttner (2001) to divide target rate adjustment to expected partand surprise to analyze the Fed’s monetary target rate adjustment effect on China’s financialmarkets. The empirical results show that the FOMC target interest rate adjustments effect onChina’s stock market, money market and foreign exchange markets were significantly. FOMCtarget rate adjustment surprise’s effect on the Shanghai Composite Index has a significant negativeeffect; besides expected interest rate adjustment has no effect on the stock market. China’sdomestic representative rate moves with the FOMC’s target interest rate adjustments (expected toadjust and is not expected to impact) in the same direction. Expected and surprise adjustment willlead to exchange rate depreciation of the RMB expected.With the outbreak of the subprime crisis, the Fed has shift monetary policy from thetraditional target rate adjustment to the quantitative easing monetary policy. The most directresponse of quantitative easing monetary policy is the Fed capital balance sheet’s rapid expansion.In this paper, we use the Fed’s total assets as a proxy variable of its quantitative easing monetarypolicy and time-varying coefficients VAR model to study the Fed’s quantitative easing monetarypolicy’s impact on China. The empirical results suggest that the Fed’s quantitative easing monetarypolicy has a positive impact on China’s consumer price index (CPI), and the degree of influence isgradually increasing. but it also contribute to the economic recovery of the country after thesubprime mortgage crisis., the Fed’s quantitative easing monetary policy has a positive impact onChina’s industrial added value growth, and the degree of influence is gradually increasing.