Non-Symmetry of China’s and USMonetary Policy Spillovers:Theoretical Modelling and Empirical Analysis

Mei Dongzhou*, and Zhang Mi

School of International Economics and Trade, Central University of Finance and Economics (CUFE), Beijing, China

Abstract: This study develops a structural vector autoregression (SVAR) framework toempirically examine the reciprocal transmission channels of monetary policies betweenChina and the United States. The primary objective is to discern potential disparitiesin the spillover effects of monetary policies and ascertain any contrasting mechanismsunderlying these effects across the two countries. Based on our research, it appears thatthere exists a certain level of non-symmetry in the spillover effects of monetary policybetween the two countries. Moreover, this paper provides adequate analysis of disparitiesin the trade framework, capital control, and financial market operations of both countriesin constructing a dynamic stochastic general equilibrium (DSGE) model that incorporatesfinancial frictions for the examination of the theoretical rationale. The empirical findingsindicate that China’s monetary policy creates a spillover effect primarily through trade.In China, following an increase in its interest rates, the domestic economic activity willexperience a contraction, leading to a decline in both investment and output. Consequently,this will result in a decrease in China’s imports of investment goods from the UnitedStates, impacting the output of the US economy. In contrast, the US monetary policy exertsa spillover effect primarily through finance. An increase in interest rates by the UnitedStates is associated with a notable outflow of capital from China. This leads to a rise in thefinancing costs for Chinese firms, consequently diminishing their overall net worth. In lightof the financial accelerator effect, corporate external financing risk premium will continueto increase, exacerbating the downward trajectory of China’s output.

Keywords: Monetary policy spillovers, non-symmetry, trade channel, financial channel,

JEL Classification Code: E44, E52, F42

DOI: 10.19602/j.chinaeconomist.2023.09.05