The spillover effects of China's monetary policy shock: Evidence from B&R countries

• Published in: Emerging markets review Vol. 55; p. 100952
• Main Authors: Chen, Yong, Liu, Dingming, Zhuang, Ziguan
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-06-2023
• Subjects: B&R countries; Monetary policy shock; Spillover effects; E52; F3; Spillover effects; F4; Monetary policy shock; B&R countries
• ISSN: 1566-0141; 1873-6173
• DOI: 10.1016/j.ememar.2022.100952

This paper examines the international spillover effects of China's monetary policy shock on macro and financial variables in 26 countries along the Belt and Road (B&R) from 2000 to 2019. We find that a surprise Chinese monetary tightening brings about a widening in the short-term interest rate spread, a drop in the equity price, nominal depreciation against the RMB and real depreciation, and an improvement in the trade balance, on average, across the 26 B&R countries. Moreover, substantial heterogeneous effects emerge in the responses of the foreign real exchange rate and the trade balance in different groups in terms of the 26 countries' trade weights with China, capital openness, and national income levels. Finally, all the empirical evidence reveals that the expenditure switching effect plays an important role in facilitating the international transmission of China's monetary policy shock.
•Estimates China's monetary policy shock series via a large Bayesian VAR model.•Examines the cross-border transmission of the shock via local projections.•Finds significant spillover effects of China’ monetary policy shock abroad.•Finds heterogeneities in the spillover effects for different country groups.•Finds the expenditure switching effect is key in the monetary policy transmission.