Oceans Apart? China and Other Systemically Important Economies

Abstract

ABSTRACT China has been considered a systemically important economy for at least a decade. As policymakers worldwide grapple with sluggish growth there is relatively little evidence about whether the G4, which consists of the US, the Eurozone, Japan, and includes China, as a block contributes to global economic performance in a manner that is not possible when China is left out or treated exogenously. We estimate a series of panel factor and standard VARs because these are well suited to exploit cross-country links. We estimate the relative impact of domestic and global factors on these four economies. First, it is essential to treat China in a model of the G4, on a level playing field with the US, the Eurozone, and Japan to better understand how shocks among these economies interact with each other. Second, we find that domestic and global shocks can reinforce each other. Indeed, global monetary shocks explain up to 60% of variation in commodity demand and real economic conditions. We also report that there is a trade-off between domestic monetary and financial conditions. We recommend that policymakers to reexamine the potential benefits from greater policy cooperation.