Abstract
<abstract> <p>In recent years, the frequency adjustment of U.S. monetary policy has a dynamic and global impact on other countries' economy. Based on the financial conditions index (FCI), the paper employs the time-varying parameter vector autoregressive model with stochastic volatility (TVP-VAR-SV) and spillover index respectively to investigate the time-varying impact of U.S. financial conditions (UFCI) on China's inflation (CINF) and its impact mechanisms. Some results are achieved as follows: first, the impacts of UFCI on CINF vary greatly over time both in the dimension of action duration and time point. Second, the effects of UFCI on CINF directly relate to different types of major events, and they are heterogeneous in action duration, degree, direction as well as the trend and range of fluctuations. In addition, UFCI can work on CINF through trade flow and China's financial market, and the China's financial market plays a main conductive role, and its conductive effect changes over time.</p> </abstract>
Highlights
The frequency adjustment of U.S monetary policy plays an important role in the volatility of China’s economy
The effects of U.S. financial conditions (UFCI) on China’s inflation (CINF) directly relate to different types of major events, and they are heterogeneous in action duration, degree, direction as well as the trend and range of fluctuations
UFCI can work on CINF through trade flow and China’s financial market, and the China’s financial market plays a main conductive role, and its conductive effect changes over time
Summary
The frequency adjustment of U.S monetary policy plays an important role in the volatility of China’s economy. The shock of global financial crisis has a considerable impact on the China’s financial market (Dooley and Hutchison, 2009; Frank and Hesses, 2009), China’s accession to WTO mainly contributes to the China’s trade flow (Buthe and Milner, 2008; Grant and Lambert, 2008), and the reform of RMB system is directly related to international capital flow because economics with more flexible exchange rate regimes attract more capital inflows (Magud et al, 2014) It results in the various effects of UFC on China’s inflation under the instantaneous shocks of different events. There are some evidences that China’s inflation responses differently to U.S financial shocks at special time points when different types of major events happened It is not clear what are the specific differences and it leads to the lack of reference for policymaker.
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