NONLINEAR SPILLOVER EFFECT OF US MONETARY POLICY UNCERTAINTY ON CHINA’S SYSTEMATIC FINANCIAL RISKS

Zhigang Ouyang,Lei Wei,László Vasa,Zhenjiang Dou

doi:10.3846/jbem.2022.16065

Abstract

Monetary policy uncertainty (MPU) not only imposes a great impact on the systematic financial risks of a country but also generates a significant spillover effect on countries having close economic exchanges with the former under the background of global economic integration. With the daily return rates of 64 listed financial companies in China from February 2006 to September 2020 used as the samples, China’s systematic financial risks were measured in this research by using long-run marginal expected shortfall (LRMES). On this basis, an FAVAR model with time-varying parameters was constructed to empirically investigate the spillover effect of US MPU on China’s systematic financial risks and its main transmission channels. Results showed that within the sample period (February 2006 – September 2020), US MPU generated a significant positive spillover effect on China’s systematic financial risks, namely, China’s systematic financial risks would be aggravated if the level of US MPU was elevated. From different time intervals, the spillover level was particularly high during global financial crises and global COVID-19 pandemic, indicating that the spillover effect of MPU is nonlinear and closely related to global major sudden risk events. Through the further research, it is found that this effect is mainly transmitted through short-term capital flow, interest rate, and economic uncertainty-induced channels, among which the short-term capital flow is the most important.

Highlights

As an important instrument for the government to implement macro-regulations, monetary policies affect national economies and create a spillover effect on the economic activities in other countries under the background of global economic integration (Kim, 2001)
If the spillover effect of US monetary policy uncertainty (MPU) on China is neglected, government sectors may be stuck in deviations when formulating macroeconomic policies, which may even aggravate the instability of the financial system and further lead to systematic financial risks
The conclusions are summarized as follows: (1) The theoretical study in this paper shows that the increase of economic policy uncertainty will result in the increase of active risk-taking level and passive risk-taking level of banks in a country, so as to aggravate its systematic financial risks, and, under the background of economic globalization, generate an influence on systematic financial risks in the countries having close relations with this country

Summary

Introduction

As an important instrument for the government to implement macro-regulations, monetary policies affect national economies and create a spillover effect on the economic activities in other countries under the background of global economic integration (Kim, 2001). The monetary policy adjustment of the Federal Reserve (Fed) in the US, the largest Previous studies have shown that the US MPU generates a spillover effect on the economic activities and financial markets in China and other countries through exchange rates, interest rates, trade, capital flow, and other channels (Baker et al, 2016; Ho et al, 2018; Jiang et al, 2019a). If the spillover effect of US MPU on China is neglected, government sectors may be stuck in deviations when formulating macroeconomic policies, which may even aggravate the instability of the financial system and further lead to systematic financial risks

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Results

Discussion

Conclusion