Contagion effects of external monetary shocks on systemic financial risk in China: Evidence from the Euro area and Japan

Abstract

This study aims to explore the impact of foreign monetary policy changes on systemic financial risk in China based on the cross-country contagion characteristics of monetary policy risk and market interactivity. We find that differences in the spillover effects of external monetary policy risks and the contagion paths of financial risks through different channels have significant time-varying characteristics. Moreover, individual markets show divergent effects in response to external monetary policy shocks, and asymmetric spillover effects exist across markets. Among them, asset price markets carry the main financial risk input pressure, whereas financial institutions and foreign exchange markets are the main senders of systemic risk to other markets. Notably, the cross-border contagion effect of risk from the interest rate hike policy in the Euro area has shown differences compared to the accommodative unconventional monetary policy.