An Empirical Study on the Dynamic Impact of Monetary and Fiscal Policies on the Herding Behavior among Manufacturing Companies

Abstract

This paper investigates the dynamic interplay between monetary and fiscal policies and their influence on herding behavior among manufacturing companies in China. Herding behavior, characterized by the tendency of firms to mimic the actions of others rather than making independent decisions, can significantly affect market stability and efficiency. The study employs a comprehensive dataset spanning a period that encompasses various monetary and fiscal policy interventions, alongside fluctuations in market conditions. Using advanced econometric techniques, including Vector Autoregression (VAR) models and Granger causality tests, we analyze the short-term and long-term effects of monetary and fiscal policies on herding behavior within the manufacturing sector. The study also examines the moderating role of firm-specific characteristics such as size, industry, and financial health on the relationship between policies and herding behavior. Preliminary findings suggest a complex and dynamic relationship between policy interventions and herding behavior. Monetary policy tools, such as interest rate adjustments and open market operations, exhibit significant short-term effects on herding behavior, influencing firms' decisions to follow prevailing market trends. Similarly, fiscal policy measures, including tax incentives and government spending, demonstrate varying degrees of impact on herding behavior, contingent upon the economic context and firms' financial positions. Furthermore, the study explores the transmission channels through which monetary and fiscal policies influence herding behavior, including their effects on market liquidity, risk perceptions, and investor sentiment. Understanding these mechanisms is crucial for policymakers and market participants to anticipate and mitigate the adverse effects of herd behavior on market stability and efficiency. In conclusion, this empirical study contributes to the existing literature by providing insights into the dynamic relationship between monetary and fiscal policies and herding behavior among manufacturing companies in China. The findings have important implications for policymakers aiming to design effective policy interventions to foster a more resilient and stable market environment, ultimately promoting sustainable economic growth and development.