Spillover Effects of U.S. Monetary Policy and Policy Uncertainty on Chinese Economy Steven Wei Ho, Ji Zhang, and Hao Zhou PBC School of Finance Tsinghua University
Motivation Background U.S. unconventional monetary policy zero lower bound LSAP QEs tapering impact on emerging market, especially China China is likely to pass U.S. as world s leading economic power
Motivation Questions How do U.S. monetary policy and policy uncertainty shocks affect China, especially during and after the Great Recession? What s the transmission channel? Which one is more important? Is there any structural change in the past few years?
This Paper What Do We Do? Factor-Augmented VAR U.S. monetary policy U.S. policy uncertainty both before and at the ZLB
This Paper Main Results At the ZLB, U.S. monetary policy shocks do have significant impact on Chinese monetary policy and real economy U.S. policy uncertainty shocks are less important Comparing the cases before and at the ZLB, Dynamics of Chinese macro variables are different under the same shocks Relative importance of the two shocks changes Indicate structural changes in both U.S. policy transmission and Chinese economy
Model FAVAR Bernanke et al(25, QJE) ( Ft Y t ) = Φ(L) ( Ft 1 Y t 1 F t : factors (T K), X t : macro variables (T N, N > K), Y t : policy indicators. ) + ν t, (1) X t = Λ f F t + Λ y Y t + e t. (2)
Model Why FAVAR? Overcomes some shortcomings of structural VAR: use more information no arbitrary choice of a specific data series impulse responses for all variables
Data Data 162 Chinese macroeconomic series (real activity variables, policy variables, price variables) U.S. policy rate: Wu-Xia shadow rate (Wu and Xia (214)) U.S. policy uncertainty: news-based measure (Baker, Bloom and Davis (213)) sample period: 2M1:214M2
Data Ajustment New Year effect (except policy variables) (Fernald et al (213)) seasonal adjustment (US Census Bureau X13 Software) EM algorithm for missing values (Stock and Watson (22, JEBS)) fast/slow moving variable (asset price vs. wages) Transformation for stationarity: no transformation, first difference, logarithm, first log difference (Bernanke et al(25, QJE), Stock and Watson (22, JEBS))
Estimation Estimation and Identification Bernanke et al(25, QJE) factors are constructed to be orthogonal to policy rate and uncertainty pc t : principal components of all series, pc s t : principal components for slow-moving series run the regression: factors are constructed to be pc t = b pc pc s t + b Y pcy t + η pc t F t = pc t b Y pcy t
Estimation Estimation and Identification Bernanke et al(25, QJE) estimate the observation equation by OLS (2 lags) estimate the transition equation by OLS identification is achieved through recursive assumption two subsamples: 2M1-28M9, 28M12-214M2
R 2 R 2 Variables Full Name R 2 before ZLB at ZLB SSEI Shanghai Stock Exchange Composite Index.928.639 PE ratio (SSE All) PE ratio (SSE All Stocks).871.86 PE ratio (SSE A) PE ratio (SSE A-Shares ).872.86 PE ratio (SSE Fin) PE ratio (SSE Finence).736.835 PE ratio (SSE RE) PE ratio (SSE Real Estate).86.87 PE ratio (SSE Const) PE ratio (SSE Construction).94.778 PE ratio (SSE Manu) PE ratio (SSE Manufacturing).92.694 Loan The Total Amount of Loans.87.52 Loan Rate (1yr) Nominal Loan Rate (1 Year).943.882 HH DR (1yr) Household Saving Deposit Rate (1 Year).932.93 SHIBOR (1d) SHIBOR (1 Day).995.62 Bond Index (Inter Bank ST) Inter-Bank Short Term Government Bond Index.921.64 FES (USD 1yr) Foreign Exchange Swap (USD 1 Year).995.142 CPI CPI.769.74 InvestRE Investment in Real Estate.948.921 NHS New Housing Start.632.479 Comm Bldg Sales Commodity Building Sales.533.279 PMI Manufacturing Purchase Management Index (Manufacturing).995.649 PMI new orders Purchase Management Index (New Orders).995.624 Auto Sales (DM) Automobile Sales (Domestically Made).467.527 Macro index Macroeconomic Index.55.715
IRFs Outline after 28M12 (ZLB is binding in the U.S.) IRFs to U.S. monetary policy shock IRFs to U.S. policy uncertainty shock before 28M12 (ZLB is not binding in the U.S.) IRFs to U.S. monetary policy shock
IRFs IRFs to USMP Shock at the ZLB U.S. Monetary Policy Shock at ZLB Policy Rate.2 USPU.5 Loan.2.4.6.8.2.5.1.1 3.4 3.15 3.15 Loan Rate (1yr).15 HH DR (1yr).2 SHIBOR (1d).1.1.1.5.5.5 3.5 3.1 3.6 Bond Index (Inter Bank ST).2 FES (USD 1yr) 2 CPI.4.2.1 1.5 1.5.2 3.1 3.5 3
IRFs IRFs to USMP Shock at the ZLB U.S. Monetary Policy Shock at ZLB Policy Rate.2 USPU.4 SSEI.2.4.6.8.2.2.2.1 3.4 3.4 3.1 PE ratio (SSE All).1 PE ratio (SSE A) PE ratio (SSE Fin).1.1.1.2.2.2.3.3 3.3 3.4 3 PE ratio (SSE RE) PE ratio (SSE Const).15 PE ratio (SSE Manu).1.2.1.5.2.4.3 3.6 3.5 3
IRFs IRFs to USMP Shock at the ZLB U.S. Monetary Policy Shock at ZLB Policy Rate.2 USPU.5 InvestRE.2.4.4.3.6.8.2.2.1.1 3.4 3 3.8 NHS.6 Comm Bldg Sales.2 PMI Manufacturing.6.4.2.4.2.1.2 3.2 3.1 3.2 PMI new orders.2 Auto Sales (DM).5 Macro index.1.2.4.6.5.1 3.8 3 1 3
IRFs Is It Interest Rate Channel? Impulse Responses of the Interest Rates at the ZLB.5 Treasury rate:6 month.5 Treasury rate:1 year.5 5 1 15 2 Treasury rate:5 year.4.2.2 5 1 15 2 Treasury rate:15 year.2.5 5 1 15 2 Treasury rate:1 year.2.1.1 5 1 15 2 Treasury rate:3 year.1.2 5 1 15 2.1 5 1 15 2
IRFs Is It Hot Money? U.S. Monetary Policy Shock at ZLB.4 hot money.3.2.1.1.2 3
IRFs Possible Channel U.S. monetary policy shock does not affect Chinese economy through market determined interest rate channel Responses of Chinese policy and international capital inflow are important U.S. MP capital inflow / people s expectations Chinese policy rates real economy
IRFs IRFs to USPU Shock at the ZLB U.S. Policy Uncertainty Shock at ZLB.6 Policy Rate.15 USPU.1 Loan.4.1.5.2.5.2.5.4 3.5 3.1 3.15 Loan Rate (1yr).15 HH DR (1yr).3 SHIBOR (1d).1.1.2.5.5.1.5 3.5 3.1 3.6 Bond Index (Inter Bank ST).3 FES (USD 1yr) 1 CPI.4.2.5.2.1.2 3.1 3.5 3
IRFs IRFs to USPU Shock at the ZLB U.S. Policy Uncertainty Shock at ZLB.6 Policy Rate.15 USPU.15 SSEI.4.1.1.2.5.5.2.4 3.5 3.5 3.4 PE ratio (SSE All).4 PE ratio (SSE A).1 PE ratio (SSE Fin).2.2.1.2 3.2 3.2 3.1 PE ratio (SSE RE).2 PE ratio (SSE Const).15 PE ratio (SSE Manu).1.2.5.1.4.2 3.6 3.5 3
IRFs IRFs to USPU Shock at the ZLB U.S. Policy Uncertainty Shock at ZLB.6 Policy Rate.15 USPU.2 InvestRE.4.1.1.2.5.2.1.4 3.5 3.2 3.6 NHS.4 Comm Bldg Sales.3 PMI Manufacturing.4.2.2.2.1.2.2.4 3.4 3.1 3.3 PMI new orders.4 Auto Sales (DM) 1.5 Macro index.2.2 1.1.2.5.4.1 3.6 3.5 3
IRFs IRFs to USMP Shock before the ZLB U.S. Monetary Policy Shock before ZLB.1 Policy Rate.3 USPU.3 Loan.2.2.1.1.1.2.1.1.3 3.2 3.2 3.4 Loan Rate (1yr).5 HH DR (1yr).15 SHIBOR (1d).2.1.2.5.4.6 3.5 3.5 3.4 Bond Index (Inter Bank ST).15 FES (USD 1yr) 1 CPI.2.1.5.5.5.2 3.5 3 1 3
IRFs IRFs to USMP Shock before the ZLB U.S. Monetary Policy Shock before ZLB.1 Policy Rate.3 USPU.1 SSEI.2.5.1.1.2.1.5.3 3.2 3.1 3.1 PE ratio (SSE All).1 PE ratio (SSE A).1 PE ratio (SSE Fin).5.5.5.5.5.5.1 3.1 3.1 3.1 PE ratio (SSE RE).1 PE ratio (SSE Const).1 PE ratio (SSE Manu).5.5.5.5.5.5.1 3.1 3.1 3
IRFs IRFs to USMP Shock before the ZLB U.S. Monetary Policy Shock before ZLB.1 Policy Rate.3 USPU.4 InvestRE.1.2.2.1.1.2.3 3.2 3.2 3.4 NHS.3 Comm Bldg Sales.15 PMI Manufacturing.3.2.1.2.1.1.5.1 3.1 3.5 3.15 PMI new orders.6 Auto Sales (DM).4 Macro index.1.4.2.5.2.2.2.5 3.4 3.4 3
IRFs Why Different at and before the ZLB? change in U.S. monetary policy transmission responses of policy rate change in Chinese economy bonds market liberalization of the interest rates managed floating exchange rate
IRFs USMP and US Interest Rates (Zhang(214)).6.4.2 2 Year Treasury 2 4 6 8 1.6.4.2 2 4 6 8 1.2.1 2 Year TIPS 2 Year Breakeven.1 2 4 6 8 1.6.4.2 5 Year Treasury 2 4 6 8 1.4.2 5 Year TIPS 2 4 6 8 1.1.5 5 Year Breakeven.5 2 4 6 8 1.4.2 1 Year Treasury 2 4 6 8 1.4.2 1 Year TIPS 2 4 6 8 1.4.2.2 1 Year Breakeven.4 2 4 6 8 1
VD Variance Decomposition Variance Decomposition Ratio (MP/PU) Variables before ZLB at ZLB 1m 2m 6m 12m 1m 2m 6m 12m SSEI.87.129.32 89.78.462.354 9.251 58.813 PE ratio (SSE All)..3.29 9.973.42 8818 2.859 249.379 PE ratio (SSE A)..3.33 1.914.46 7479 2.749 253.49 PE ratio (SSE Fin).16..55 164.872 5.991 11.672 18.486 29.8 PE ratio (SSE RE)..17.1 4.114 1.539 4.477 88.145 68.655 PE ratio (SSE Const).5.47. 35.81.891 4.278 994.457 3.264 PE ratio (SSE Manu).7.57.16.217.593 2.551 1.281 254288 Loan. 12.958.977.434 83.851 286.516 5.67 6.229 Loan Rate (1yr).95.21.57 1.7.7.158 8.91 33.931 HH DR (1yr).27.136.115 3.21.29.265 9.14 41.26 SHIBOR (1d).1.3.5.238 1.343.482 6.98.653 Bond Index.532 15.728 58.577 122.821 5.789 137.944 2.522 67.232 FES (USD 1yr).1.3.5.238 1.342.477 7..649 CPI.3 1.994 1.33.485.98.513 241.168 12.285 InvestRE.171.42 1.488 11.697 652.787 57.61 15.39 51.16 NHS.184.524 2.181 56.772 4.615 3.149 6.259 62.56 Comm Bldg Sales.169.261.24.821 29.534 5.371 985.425 71.211 PMI Manufacturing.1.3.5.238 1.346.486 7.71.645 PMI new orders.1.3.5.238 1.347.49 7.62.647 Auto Sales (DM).761.66 1.61.42 6.584 46721.652 143.343 9.218 Macro index 81.93.1.18.33 1.442 311.628 2.459 34.96
Conclusion Results At the ZLB, U.S. monetary policy shocks do have significant impact on Chinese real economy The impact transmits not through market interest rate channel Possible transmission mechanism: hot money and people s expectations Chinese policy rates real economy U.S. policy uncertainty shocks are less important Comparing the cases before and at the ZLB, Dynamics of Chinese macro variables are different under the same shocks Relative importance of the two shocks changes Indicate structural changes in both U.S. policy transmission and Chinese economy
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