The International Transmission Mechanism Of The U.S. Monetary Policy And Its Impact On China’s Monetary Policy

In order to stimulate the sluggish economy due to the global financial crisis in2008, the Fed launched the first round of quantitative easing monetary policy at theend of2008, which was followed by the QE2, QE3and QE4. Chinese monetaryauthorities also launched loose monetary policy as a response to the quantitative easingmonetary policy. Monetary policy of a country may generate spillover effects to othercountries’ monetary policies in an open economy, and this transmission mechanismworks by different channels in different conditions. As Sino-U.S. trade and financialrelations are developing, the research on the impact of monetary policy of U.S. on themonetary policy of China as well as the transmission mechanism and the reasonsleading to such impacts, has important theoretical and practical significance.This article is divided into six chapters.Chapter1is an introduction. This chapter first explains the research backgroundand significance, followed by a literature review, which generalizes literatures on themonetary policy transmission mechanism from U.S. monetary policy to China’smonetary policy, and gives the summary and commentary of the existing literature;then the chapter describes the research method, the innovation and shortcomings ofthis paper.Chapter2are theoretical models of international transmission of monetary policyunder the open economy, which reviews the Mundell-Fleming Model and the newopen economy macroeconomics model briefly, and then gives the applicability of thetwo models.Chapter3is the discussion of transmission from U.S. monetary policy to China’smonetary policy. The first part analyses the linkage between monetary policy of Chinaand the U.S., including the characteristics of the linkage and the impact of the quantitative easing monetary policy in the U.S. on the linkage. As to the characteristicsof the linkage, this part analyzes the impact of U.S. monetary policy on the RMBbenchmark interest rate, the dollar deposit rate and deposit reserve rate of China.Overall, the shocks of the U.S. monetary policy on China’s monetary policy are moresignificant since2004, which exist a delay to a certain extent. As to the impact of thequantitative easing monetary policy of the U.S. on the linkage, since the outbreak ofthe global financial crisis in2008, the United States launched four rounds ofquantitative easing monetary policy, which had shocks on China’s monetary policy.First, in order to withstand the impact of the global financial crisis, China adopted aloose monetary policy, but with QE3and QE4continuing, China’s monetary policysank into a "dilemma" predicament; second, the capital flows caused by quantitativeeasing monetary policy have led to China’s monetary authorities to change themonetary policy tools; third, in order to maintain a stable exchange rate, RMB had tore-peg to the dollar. The second part is the empirical research on the transmission fromU.S. monetary policy to China’s monetary policy. The empirical research establishes aSVAR model including the federal funds rate, the U.S. industrial production index, theU.S. consumer price index, China’s one-year benchmark deposit rate, China’s broadmoney supply M2, China’s industrial added value and China’s consumer price index.Derived from the empirical results, the conclusion is that changes in U.S. monetarypolicy have a great impact on China’s monetary policy, and this effect is mainlyreflected in the change in China’s interest rate, but the impact on China’s money supplyis not so obvious.Chapter4describes the transmission channels from U.S. monetary policy toChina’s monetary policy. First part describes the transmission channels of the spillovereffects of the U.S. monetary policy. The study investigates the three channels of U.S.monetary policy to China’s monetary policy on the basis of comprehensive studies,which are trade channel, exchange rate channel and foreign exchange reserveschannels, and analyzes the process of the transmission mechanism of three channels.Second part is the empirical research, which is based on the SVAR model in Chapter3. The empirical research investigates the relative importance of the monetary policytransmission channels from U.S. monetary policy to China’s monetary policy byanalyzing the influence of the federal funds rate and the channels variables on China’smonetary policy variables. The conclusion can be derived from the results of theimpulse response function and variance decomposition: the U.S. monetary policy hasstronger spillover effects through the financial market channel which are exchange ratechannel and foreign exchange reserves channel than through the international tradechannel.Chapter5analyzes the reasons why the U.S. monetary policy impacts on China’smonetary policy. The First reason is that the Dollar Standard leads to the result thatU.S. monetary policy has asymmetric effects on China’s monetary policy. First, underthe Dollar Standard, the dollar has dual identities including sovereign nationalcurrency and international currency, which will make U.S. monetary policy has aneffect on China’s monetary policy; second, under the Dollar Standard, the way of thedollar supply determines that the U.S. monetary policy will have an impact on China’smonetary policy; third, the degree of China’s dependence on the dollar determines thedegree of shocks of the U.S. monetary policy on China’s monetary policy. The secondreason is that in the case of gradual liberalization of controls on capital flows, theexchange rate regime that RMB is de facto pegged to the U.S. dollar makes China’smonetary policy lose independence gradually. Finally, the fact that China--as a tradingcountry--depends on the U.S.--as a financial country--doubly in the commoditymarkets and financial markets is the fundamental reason leading to the result thatChina’s monetary policy depends on the U.S. monetary policy, and this kind ofdependence presents self-reinforcing trend.Chapter6explores how China’s monetary policy reduces the reliance on U.S.monetary policy. According to the reasons described in Chapter5, this chapterproposes the measures of the following points: The first is to reduce the dependence onthe dollar standard, which needs to transform the mode of economic developmentgradually from the traditional export-oriented economic development mode to the internal and external balance development mode; secondly needs to avoid the risks offoreign exchange reserves; finally needs to promote China’s economic structureadjustment. The second is to speed up the reform of RMB exchange rate formationmechanism. Monetary authorities should raise the floating range of RMB exchangerate, and achieve the independence and effectiveness of the monetary policy throughthe free floating of the exchange rate. Then we should improve the foreign exchangemarket, and adjust the intervention means of the central bank in the foreign exchangemarket. The third is to accelerate financial restructuring. Monetary authorities shouldspeed up the process of market-oriented interest rate, promote the development ofChina’s financial markets, and narrow the development of Sino-US differences in thedegree of financial markets. The fourth is to promote the reform of the internationalmonetary system, to promote the process of diversification of reserve currency, toaccelerate the process of internationalization of the RMB, and to participate in thereform of the international financial institutions and the international financialregulatory system actively.