Business Cycle Synchronization and Monetary Policy Coordination Between the U.S. and China: Evidence From a Structural VAR Model

Abstract

This article studies the interactions between the U.S. and China’s economies in an integrated structural VAR model. We incorporate seven variables representing both the U.S. and China’s economies and use both short-run and long-run restrictions to identify the structural shocks and examine impacts of these shocks on outputs, prices, and monetary policies of the two countries. Using monthly data from 2000:1 to 2015:6, we find that China’s business cycles have become increasingly synchronized with the U.S. economy and China’s monetary policy coordinated with that of the United States, since China’s output, consumer price, and monetary policy all respond in a symmetric way to the U.S. macroeconomic shocks, but the same is not found for the United States to China’s. However, we do find that China exerts influence on the U.S. consumer price. Our results have important policy implications regarding the bilateral economic relations between China and the United States.