The Spill-over Effects Of US Monetary Policy On China And Sino-US Monetary Policy Coordination

With the integration of global economy and the process of financial liberalization, the economic interdependence and impact on monetary economic domains between countries rises. The monetary policy of one country not only affect the domestic economic destinations through interest rate channel, trading channel, other asset price channel and credit channel, but also generates spill-over effects by affecting the monetary market, stock market, import and output of another country, and further take effects on the real economic variables including output and inflation. Since the financial crisis in2008, major economic bodies including the United States have been taking irregular, quantitative easing monetary policies. These policies, meant to improve the domestic economic situations, would also impact the financial market and real economy of other countries. For countries with highly economic interdependence, the best way to avoid the negative effects of monetary spill-over effects is to carry on international monetary policy coordination. Covering these cases, this essay makes research on the existence of US'monetary spill-over effects on China, the change of US'spill-over effects on China after the QE policy, the welfare earning of Sino-US monetary policy coordination and the possible mood of Sino-US policy coordination. This article can be divided into7chapters:Chapter1introduces the research background and research meaning of this article, and concludes researches both inside and outside China. With the rise and China's degree of openness and the accumulation of exchange reserves, China has been facing growing monetary policy spill-over effects from other countries, especially from the US. Since the financial crisis in2008, Major economic bodies of the world have been practicing easing monetary policy, oh which the QE policy of the Federal Reserve is the most typical. These monetary policy practices also has spill-over effects on China. And China needs to reinforce the Sino-US monetary policy coordination to decrease the negative spill-over effects. Most researches on monetary policy spill-over effects were done with the empirical method, this article concludes the methods and contents of research on monetary policy spill-over effects, as well as the latest research after the QE monetary policy. Most researches on international monetary coordination is done through conduction of theoretic models, the key points includes the welfare result of policy coordination, the roots for earnings and costs of monetary coordination, and the methods to improve the coordination results. Since the outbreak of the financial crisis, the theoretic field gives further research on the crash of crisis on coordination policies and the contemporary policies during the crisis,and makes discussion on the direction for further international monetary policy coordination. With the theories and instruments given by former researches, the research contents and innovations are refined.Chapter2introduces the two framework for the research in open economy, and compares their application on the research of monetary policy spill-over effects and monetary policy coordination. This article first introduces the basic model and theoretic meanings of Mundell-Flemins-Dornbush framework and New Open Economic Marco-economics. Then this article introduces the contents and features of the use of the two frameworks in the research of monetary spill-over effects and international monetary coordination. The NOEM framework, with its advantage of sound micro foundations and flexible adjustment of the models, could better simulate the variations of real economic environments, thus is frequently used in the research of monetary spill-over effects. However, in the analysis on the channel of monetary spill-over effects, the M-F-D framework, with its advantages of being direct and brief,is more frequently used. In the field of monetary policy coordination research, however, the NOEM models take the advantage of prefect micro foundation and welfare analysis ability, and can be applied to the analysis and research of a given country, and has wide usage scopes, which makes it a major analysis framework in monetary policy coordination.Chapter3gives empirical research on the US monetary policy's spill-over effects on China. This article introduces the basic model of monetary policy spill-over effects and chooses empirical variables from the model, inducing the inter-relationship of the variables. The results of the empirical research reveals that, the US monetary policy has spill-over effects on China's output and inflation. When a positive impulse is given in the US monetary policy, the output of China turns out a negative response, and a slow raise back, which is still lower than the original level. The response of inflation has a similar feedback, but smaller changes, in the long periods,the price level raises above the original level. Then this article takes research on the channels for US monetary policy to China on the basis of paper conclusion and model conduction. The main channels for monetary policy spill-over effects includes policy channel, international trading channel and capital moving channel, of which the output of China is mainly affected by the trading channel while the inflation is mainly affected by the policy channel.Chapter4makes a compare of the spill-over effects before and after the QE polices, and analyses the reason for this change. The impulse response results of China's output reveals that, before the QE polices China's output sees a decrease at first, surpassing the original level in the long run; When the QE policy is given, when the Federal Reserve augments is total asset scale, the output of China falls immediately, and rise back soon to the new balance,which is higher than the original level. The impulse response of the inflation reveals that, before the QE polices, when the Federal Reserve augments its asset scale, the price of China drop at first, but soon rise back to surpass the original level in the long run, When the QE policy is given, the price of China rises rapidly,and rise even higher after a short decrease. The channel for QE policy also increases beyond the3types given in Chapter3to include the expectation of the public and the asset-liability table of central bank and enterprises.Chapter5makes research on the necessary of Sino-US monetary policy coordination. This article uses the new area model under NOEM framework and builds a two country DSGE model with the situation of China and the States, and calculates the potential welfare earning through monetary coordination and the influencing factors. The welfare gains and the factors for the welfare gains is also given. The results shows that the welfare gains vary when the trading openness, monetary aims changes, the highest gain is0.65%and the lowest gain is-0.4%. The change in US monetary policy is the main root for negative coordination gains. The US monetary bureaucy would be reluctant to take coordination for it brings negative to the US in general.Chapter6discusses the possible model for Sino-US monetary policy. This article concludes the practices and features of monetary coordination since the break down of the Breton Woods System. Then this article introduces the monetary measures and policies since the financial crisis. On this basis, this article concludes the contents and methods for monetary coordination and further induced the models for monetary coordination models. This article holds the idea that the optimal mode for Sino-US monetary coordination is aimed exchange rate area, and the methods is to take exchange rate cooperation gambles. In the short run, China and US should take the mixed monetary coordination which is both regular and flexible, and in the long run, China and the US should try to take aimed exchange rate area and fix both exchange rate to a supre-sovereign monetary unit.Chapter7concludes the whole article, including the literature review, theoretic induction, empirical analysis, data simulation and relative policy suggestions. The suggestion for further researches is given at the end of the essay.