The Transmission of U.S. Monetary Policy Shocks to the China’s Output and Inflation: An Empirical Analysis

Abstract

We employ the SVAR model to examine the impact of U.S. monetary policy shock on the Chinese real output and inflation. Our main result shows that the effect of transmission of short-term international capital flows is stronger than the balance of trade and the world commodity prices index. The exchange rate of RMB has the weakest transmission effect. Expansionary monetary policy shocks of the United States will increase real output and consumer price index of China and the United States; but the U.S. real output growth is higher than that of China; China’s consumer price index rise higher than that of United States. Based on this, China should gradually adjust economic growth model, increased the per capita disposable income and strengthen regulate the speculative short-term international capital flows.

Key words: Monetary policy shock; Transmission channel; SVAR model; Impulse response