Financial Friction,International Financial Contagion And Macroeconomic Policy

The outbreak of the US financial crisis in late 2007 not only caused serious damage to their original country,but also had a great impact on the other country's macroeconomic and financial markets,reflecting significant cross-country contagious characteristics.This paper focuses on China and the US during the financial crisis as an object of my study,revolves around the research theme of international financial contagion,and develops global empirical and theoretical models to study three issues in detail: One,the stylized facts of financial contagion between China and US;Two,the theoretical propagation mechanism of the financial contagion;Three,three,the effect of macroeconomic policy implementation.The analysis on these three aspects in this paper is closely connected with each other.The specific processes and key findings of this paper can be summarized as follows:First,to examine the stylized facts of China caused by financial contagion,this paper develops a global vector autoregression(GVAR)model and introduces a global trade linkage between both countries,gives an empirical analysis about the negative impact of the US economy on the business cycle co-movement between China and the US in the static and dynamic view,respectively.The analysis of the generalized impulse response functions of GVAR model shows that: First,A negative shock to real GDP of the US has a significantly negative impact on the amount of private credit and asset prices of the US and China,but is unsustainable;Second,the sudden decline to the US private credit has negative impact on Chinese inflation and the amount of Chinese private credit,and has positive impact on the real GDP and asset prices of China,but all dynamics are not significant;Third,a sudden drop in US asset prices make domestic real GDP,inflation and the amount of private credit decline,while China's real GDP,the amount of private credit and asset prices experience decline,reflecting the strong business cycle co-movement between China and the US.,moreover,all the impulse response are significantly sustainable.Among analysis above,the impulse responses of China under the negative shock of the US private credit and asset price summarize the stylized facts of China caused by financial contagion.Secondly,in order to investigate the theoretical propagation mechanism of financial contagion,this paper develops a two-country New Keynesian dynamic stochastic general equilibrium(Two-Country DSGE)model with heterogeneous financial frictions between two national credit markets,and introduces BGG-type financial accelerator and GK-type financial accelerator into the model to establish four kinds of Two-Country DSGE models,and then applies sudden decline of foreign country's debtors net wealth and the quality of capital to simulate a financial crisis.The analysis results about the impulse response functions of the two countries can be summarized to two points: first,financial shocks of foreign country trigger a deterioration in its credit department,then form a financial crisis by the amplification effects of the financial accelerator,through the channel of trade,financial crisis makes home country's exports experience endogenous fall,yielding the amplification effect of home country's domestic financial accelerator,by this cross-country contagious channel,financial crisis spreads between countries;second,based on matching the co-movement stylized fact of the above GVAR model,this paper compares four kinds of Two-Country DSGE models and finds that the more realistic theoretical propagation mechanism to analyze financial contagion are presented with GK-type financial accelerator in both countries.These results can be applied to explain the contagious impact of US financial crisis on China.Finally,for the sake of analyzing the effect of macroeconomic policy responding to the contagious influence of financial crisis,We base on the more realistic New Keynesian Two-Country DSGE model which contain GK-type financial accelerator in both countries,and introduce quantitative easing policy rule and fiscal policy rule,then simulate the effect of fiscal policy of home country under the background of international financial contagion and the implementation of foreign quantitative easing policy.The results of numerical simulation show that the effect of fiscal policy implemented by home country will be affected by the strength level of foreign quantitative easing policy.When foreign quantitative easing policy is weak,fiscal policy can efficiently alleviate the financial contagion,but when foreign quantitative easing continues to overweight,the impact of fiscal policy on the home country is likely to be dominated by crowding-out effect.In this case,the volatilities for domestic investment and financial market are more intense,thus the fiscal policy can't achieve the desired effects.This result can be applied to explain the two-sided effect of "four trillion" policy and evaluate the fine-tuning macro-policy implementation imposed by the "New Normal" strategy.