The Spillover Effects Of US Monetary Policy On China’s Economic Fluctuations

China’s focus on future development centers around the coordination of "development"and "security" with a particular emphasis on improving risk response capabilities.Moving forward,China plans to deepen its reform and opening-up efforts while formulating effective policies and measures to mitigate the negative impact of external shocks on economic and financial stability.The global economy is currently facing a range of uncertainties,including the ongoing COVID-19 pandemic,rising commodity prices,and the US Federal Reserve’s interest rate hike.Of particular note,the US monetary policy’s international dominance has significant implications for the global economic landscape.In the past,the Federal Reserve’s interest rate hike cycles have led to downward pressure on emerging and developing economies,such as the "Taper panic" of 2013,which caused capital outflows,asset price declines,and trade volume and output contractions in many emerging market economies.The impact of the Fed’s monetary policies on other countries extends beyond trade channels and into the global financial cycle,thereby increasing systemic risk in other countries.Since 2020,US inflation has been on the rise due to factors such as unlimited quantitative easing,persistent supply chain disruptions,and increasing international oil prices.In an attempt to control the mounting domestic inflation,the Federal Reserve began raising interest rates in March 2022 and has since aggressively increased its benchmark rate to levels last seen in 2008.Based on past events,this aggressive interest rate hike by the Federal Reserve is likely to result in currency depreciation,trade contraction,capital outflow,and downward economic pressure in other countries,particularly emerging markets and developing economies.Against the backdrop of the US interest rate hike cycle and the intensifying power struggle,it is imperative to investigate the impact of US monetary policy on China’s economic and financial stability as well as the macro-policy response.The issue of monetary policy in an open economy is a well-established research area.However,this paper provides a novel research perspective by examining the impact of US monetary policy on other countries through the lens of "trade finance".Given the dominance of the US dollar in the international monetary system,the effects of US monetary policy are asymmetrically transmitted to other countries via trade and financial channels.While prior studies have investigated these channels separately,trade finance the credit and financing facilities provided by financial institutions to traders for trade settlement plays a critical role in connecting commodity and financial markets.The literature provides ample information on the attributes of trade finance,trade channels,and financial channels,which serves as an important basis for this study.Nevertheless,limited research has explored the international spillover effects of US monetary policy from the perspective of trade finance,which integrates trade and financial channels within the dominant currency framework.Therefore,there is a need to broaden research on the impact of trade finance on the cross-border transmission of monetary policy under the dominant currency paradigm.This study first examines the impact of trade finance on trade channels by integrating trade finance with the trade channels of monetary policy transmission.The LCP pricing model is utilized to incorporate trade finance into the DSGE models of two countries in the form of trade costs,and the behaviors of importers and exporters,characterized by financing constraints,are described.The findings indicate that under the dominant currency paradigm,trade finance strengthens the influence of trade channels,resulting in a significantly increased marginal impact of US monetary policy on Chinese enterprises.In comparison to currency trade finance,trade finance in the dominant currency reinforces the spillover effects of US monetary policy on export enterprises in peripheral countries,as well as strengthens the impact on consumer price inflation and output in these countries.Moreover,further research suggests that the strengthening effect of trade finance on monetary policy spillover increases with trade finance dependence.Additionally,the extended Taylor Rule,which responds to exchange rate fluctuations,can effectively reduce the risk of economic volatility and inflation and improve the welfare of domestic residents,as opposed to the simple Taylor Rule.To investigate the influence mechanism of trade finance on financial channels,the study constructs a DSGE model that incorporates financial friction between two countries.This model includes the short-term foreign debt attribute of trade finance,and calibrated parameters are used for numerical analysis.The results suggest that financial friction exacerbates the spillover effect of US monetary policy on the Chinese economy.The tightening of US monetary policy led to a sharp decline in capital inflows into China,a depreciation of the RMB,a widening of interest rate spreads,and a decline in real economic activity.Compared with foreign currency foreign debt,domestic currency foreign debt can significantly reduce the negative spillover effect of US monetary policy.Furthermore,the study finds that a pegged exchange rate system will significantly increase the negative impact of the US monetary policy on China’s economy.Additionally,the study also examines the effectiveness of policy measures in mitigating the negative impact of US monetary policy spillovers on China’s economy.The analysis shows that a more flexible exchange rate regime,a higher degree of financial openness,and the use of countercyclical macroeconomic policies can effectively reduce the negative impact of US monetary policy spillovers on China’s economy.Moreover,the study also suggests that policymakers should pay more attention to the development of trade finance and take measures to reduce the dependence of Chinese enterprises on foreign currency trade finance,and promote the use of domestic currency trade finance to reduce the negative impact of US monetary policy on China’s economy.Overall,the study provides important insights into the role of trade finance in the spillover effects of US monetary policy on China’s economy and suggests policy measures to mitigate its negative impact.Further,this paper analyzes the influence mechanism of trade finance on the spillover effect of US monetary policy on China from the perspectives of trade channels and financial channels.It also evaluates the effectiveness of policy responses,particularly the inhibition effect of cross-border capital flow management measures.Research hypotheses are proposed based on literature and theoretical analysis,and macro and micro data are used for empirical analysis.First of all,based on literature reasoning and mechanism analysis,the hypothesis of the effect of cross-border capital flow management is obtained,and then China’s macro data and listed company data are used for research.The results show that cross-border capital flow management has a direct impact on trade finance,macro-prudential tools,capital controls or foreign exchange intervention have a positive effect on maintaining financial stability from external risks,preventive policies implemented in advance are better,and different policy measures have heterogeneous effects.Macro prudential policies can significantly curb the impact of US monetary policy shocks on trade finance.Specifically,cross-border capital flow management can significantly restrain the macroeconomic impact of US monetary policy shocks on China.Stricter macro-prudential policies and capital controls reduce the sensitivity of Chinese enterprises’ liquidity to US monetary policy shocks.Compared with other enterprises,cross-border capital flow management measures have a more significant effect on export enterprises and non-state-owned enterprises.Measures to manage cross-border capital flows can help strengthen macroeconomic resilience to US monetary policy shocks.Cross-border capital flow management measures can effectively reduce the spillover effects of US monetary policy,which helps China maintain its monetary policy autonomy in the face of the global financial cycle.In the concluding chapter,based on the main findings from the theoretical and empirical analyses,a summary of the conclusions from previous chapters is provided.In addition,policy recommendations are proposed,taking into account the study’s results.The policy suggestions aim to be more targeted and effective in addressing the issues related to trade finance,monetary policy spillovers,and cross-border capital flow management.Finally,feasible research directions for future studies are also discussed.