Oceans Apart? China And Other Systemically Important Economies

Abstract

For at least a decade, in policy circles, China has been considered a systemically important economy. As policy makers worldwide grapple with sluggish growth there is relatively little evidence about the extent to which the G4, which consists of the US, the Eurozone, Japan, and China, as a block contributes to global economic performance in a fashion that is not observed when China is omitted or treated as exogenous perhaps because of its status as an emerging market economy. We estimate a series of panel factor VARs because these seem best suited to exploit cross-border links and determine the relative impact of domestic and global factors. Most importantly, we conclude that domestic and global shocks can reinforce each other. We also conclude it is essential to treat China on a level playing field with the US, the Eurozone and Japan if we are to better understand how shocks among these economies interact with each other. In addition, domestic monetary shocks have no global real effects. However, these same shocks lead to a modest global loosening of monetary policy and financial conditions. Global monetary shocks explain up to 60% of variation in commodity demand and real economic conditions. We conclude that there is scope for net benefits from greater policy cooperation.