US monetary policy shocks and the Chinese economy: a GVAR approach

ABSTRACT

Using a global vector auto regressive (GVAR) methodology, this article examines the impact of US monetary policy shocks on China’s major macroeconomic indicators. Our analysis reveals that a positive shock to the US money supply growth rate initially increases China’s inflation rate but after some time this effect completely disappears. This shock also raises China’s short-term interest rate and the Chinese currency appreciates against the US dollar. A positive shock to the US short-term interest rate increases China’s short-term interest rate but the real output growth and inflation rates decline and the Chinese currency appreciates.

KEYWORDS:

• Economic shocks
• monetary policy transmission
• GVAR
• China

JEL CLASSIFICATION:

• G15
• E52

Acknowledgements

The authors are grateful to several colleagues and anonymous reviewers for very helpful comments and suggestions. All remaining errors and imprecations are the sole responsibility of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Recent related studies using GVAR methodology include Chudik and Fratzscher (2011), Osorio and Unsal (2013) and Garratt, Lee and Shields (2016).

² These countries are China, Japan, the UK, the US, Canada, Australia, New Zealand, Korea, Indonesia, Thailand, Philippines, Malaysia, Singapore, Sweden, Switzerland, Norway, Brazil, Mexico, Argentina, Chile, Peru, India, South Africa, Turkey, Saudi Arabia and the Euro-zone comprising of Germany, France, Italy, Spain, Netherlands, Belgium, Austria, Finland.

³ Monthly data on some variables was converted in to quarterly data.

⁴ A detailed discussion of GVAR methodology can be found in, among others, Dees (2016) and Noya, Lanzilotta, and Zunino (2015).

⁵ Data required for bi-lateral trade weights was extracted from IMF Direction of Trade statistics.

⁶ The results, not provided here, to keep the article within the word limit of 2000, are available upon request.