Time-varying, Fed's Interest Rate Hike And China's Output

Recently,US has changed its monetary policy from quantitative easing monetary policy to interest rate hike,which has brought great impact on global economy and financial markets. The interest rate hike is not for the first time, while each round of rate hike has its specific economic background, the impact of the Fed's interest rate hike also changes over the time.This paper focuses on the spillover effects on China's Output of Fed's interest rate hike. Based on the theory of international monetary policy spillover effects, we establish a TVPVAR model by using quarterly data of interest rate, output and real effective exchange rate from 1996-2015 to test the dynamic structural change and explain it in two transmission mechanism——exchange rate and interest rate.The results show that the spillover effects on China's Output of Fed's interest rate hike is changing with various factors, such as China's exchange rate regime, the opening degree with other countries, the influence of economic boom etc.In detail, when Fed raise interest rate in 1999, China's monetary policy is still independent and can choose to cut interest rates. Although the shock form exchange rate channel is negative which due to the rising cost of imports is greater than the increase in exports, but the increase from domestic credit in the interest rate channel, lead to a positive impact totally.When Fed raise interest rate in 2004, China followed to raise its interest rate according to the impossible triangle. This time, increasing of exports in exchange rate effects channel and capital inflows in the interest rate channel together, strengthen the overall positive impact.While Fed raise interest rate in 2015, China execute the easing monetary policy. The capital accelerate flow out in the interest rate channel, while the reduction of import demand in the United States reinforced the negative effects, leads the impulse to vary from positive to negative. Structural change do exist there.Finally, based on the results, this paper further predict the probability and other details of Fed's interest rate hike, and give some relevant policy recommendations to hedge the negative effects. China should give full play to the role of fiscal policy, through the issuance of local government bonds, embarked on the tax reform and other ways to promote domestic investment, stimulate consumption and increase domestic demand combing with the deepening of reform.