The spillover effect of international monetary policy on China's financial market

Cunyi Yang; Li Chen; Bin Mo; Cunyi Yang; Li Chen; Bin Mo

doi:10.3934/QFE.2023026

Quantitative Finance and Economics

2023, Volume 7, Issue 4: 508-537. doi: 10.3934/QFE.2023026

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Research article

The spillover effect of international monetary policy on China's financial market

1.
Lingnan College, Sun Yat-Sen University, Guangzhou, 510275, China
2.
Questrom School of Business, Boston University, Boston, 02135, USA
3.
Guangzhou Institute of International Finance, Guangzhou University, Guangzhou, 510006, China

Received: 29 August 2023 Revised: 27 September 2023 Accepted: 08 October 2023 Published: 11 October 2023
JEL Codes: F36, E58, G15

This study analyzes the impact of global financial integration and monetary policies from the United States, European Union and Japan on China's financial markets post-pandemic. Using TVP-FAVAR (Time-Varying Parameter Factor Augmented Vector Autoregression) and TVP-VAR-DY (Time-Varying Parameter Vector Autoregression DY) models, a Chinese financial market stress index was developed, showing that developed nations' monetary policies influence China's financial stress. The impact varies based on the economy's size and policy effectiveness. The spillovers occur mainly through accelerated short-term capital flows and foreign exchange reserve fluctuations. These effects have evolved over two decades, particularly noticeable during economic crises and the COVID-19 pandemic, highlighting the need for emerging economies, like China, to protect against international financial spillovers.
- monetary policy,
- financial market stress index,
- TVP-FAVAR,
- TVP-VAR-DY
Citation: Cunyi Yang, Li Chen, Bin Mo. The spillover effect of international monetary policy on China's financial market[J]. Quantitative Finance and Economics, 2023, 7(4): 508-537. doi: 10.3934/QFE.2023026

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Abstract

This study analyzes the impact of global financial integration and monetary policies from the United States, European Union and Japan on China's financial markets post-pandemic. Using TVP-FAVAR (Time-Varying Parameter Factor Augmented Vector Autoregression) and TVP-VAR-DY (Time-Varying Parameter Vector Autoregression DY) models, a Chinese financial market stress index was developed, showing that developed nations' monetary policies influence China's financial stress. The impact varies based on the economy's size and policy effectiveness. The spillovers occur mainly through accelerated short-term capital flows and foreign exchange reserve fluctuations. These effects have evolved over two decades, particularly noticeable during economic crises and the COVID-19 pandemic, highlighting the need for emerging economies, like China, to protect against international financial spillovers.

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