Non-Symmetry of China's and US Monetary Policy Spillovers:Theoretical Modelling and Empirical Analysis

This study develops a structural vector autoregression(SVAR) framework to empirically examine the reciprocal transmission channels of monetary policies between China and the United States. The primary objective is to discern potential disparities in the spillover effects of monetary policies and ascertain any contrasting mechanisms underlying these effects across the two countries. Based on our research, it appears that there exists a certain level of non-symmetry in the spillover effects of monetary policy between the two countries. Moreover, this paper provides adequate analysis of disparities in the trade framework, capital control, and financial market operations of both countries in constructing a dynamic stochastic general equilibrium(DSGE) model that incorporates financial frictions for the examination of the theoretical rationale. The empirical findings indicate 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 will experience 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 United States, impacting the output of the US economy. In contrast, the US monetary policy exerts a spillover effect primarily through finance. An increase in interest rates by the United States is associated with a notable outflow of capital from China. This leads to a rise in the financing costs for Chinese firms, consequently diminishing their overall net worth. In light of the financial accelerator effect, corporate external financing risk premium will continue to increase, exacerbating the downward trajectory of China’s output.