Dynamic connectedness among monetary policy cycle, financial cycle and business cycle in China

Abstract

This study explores the cyclical features and the dynamic spillovers among monetary policy cycle, financial cycles (including credit, housing and stock market cycles) and business cycle in China during 1998–2018. We find that the five cycles exhibit a strong synchronicity in terms of responses to extreme events, and the spillovers among them are bi-directional and time-varying. Stock market cycle replacing business cycle becomes the main risk transmitter after the recent global financial crisis, while monetary policy and credit cycles act as risk receivers over the entire sample. Our findings verify the importance of financial cycle shock in business cycle dynamics and monetary policy formulation.