Nonlinear spillover effect of US monetary policy uncertainty on China’s systematic financial risks
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.
Keyword : MPU, spillover effect, systematic financial risks, nonlinear, LRMES, global major financial risk events
How to Cite
Ouyang, Z., Dou, Z., Wei, L. ., & Vasa, L. (2022). Nonlinear spillover effect of US monetary policy uncertainty on China’s systematic financial risks. Journal of Business Economics and Management, 23(2), 364–381. https://doi.org/10.3846/jbem.2022.16065
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Jiang, F. W., Guo, P., & Guo, Y. M. (2019a). The impacts of Federal Reserve’s monetary policy on Chinese asset prices. Journal of Financial Research, 467(5), 37–55.
Jiang, T. (2020). Spillover effect of US economic policy uncertainty: Evidence from syndicated loan in emerging economies. Finance and Trade Research, 31(2), 18–29.
Jiang, Y., Zhu, Z., Tian, G., & Nie, H. (2019b). Determinants of within and cross-country economic policy uncertainty spillovers: Evidence from US and China. Finance Research Letters, 31, 195–206. https://doi.org/10.1016/j.frl.2019.08.004
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Kaminsky, G. L., & Reinhart, C. M. (1998). Financial crises in Asia and Latin America: Then and now. The American Economic Review, 88(2), 444–448.
Kim, S. (2001). International transmission of US monetary policy shocks: Evidence from VAR’s. Journal of Monetary Economics, 48(2), 339–372. https://doi.org/10.1016/S0304-3932(01)00080-0
Korobilis, D. (2013). Assessing the transmission of monetary policy using time-varying parameter dynamic factor models. Oxford Bulletin of Economics and Statistics, 75(2), 157–179. https://doi.org/10.1111/j.1468-0084.2011.00687.x
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Li, Z., Zhu, M. H., & Wen, B. H. (2021). The cross-country spillover effect of economic policy uncertainty and the working mechanism. Finance & Trade Economics, 42(1), 92–106.
Mishkin, F. S. (1995). Symposium on the monetary transmission mechanism. Journal of Economic Perspectives, 9(4), 3–10. https://doi.org/10.1257/jep.9.4.3
Ouyang, Z. G., He, F. M., & Xue, L. (2018). Economic policy uncertainty, dual-wheel drive and economic growth. Systems Engineering – Theory & Practice, 39(4), 986–1000.
Pastor, L., & Veronesi, P. (2012). Uncertainty about government policy and stock prices. The Journal of Finance, 67(4), 1219–1264. https://doi.org/10.1111/j.1540-6261.2012.01746.x
Peng, H. F., & Zhu, X. Q. (2019). Multiple arbitrage motives and shock effects of short-term capital flows: Dynamic analysis based on TVP-VAR. Economic Research Journal, 54(8), 36–52.
Phan, D. H. B., Iyke, B. N., Sharma, S. S., & Affandi, Y. (2021). Economic policy uncertainty and financial stability: Is there a relation? Economic Modelling, 94, 1018–1029. https://doi.org/10.1016/j.economd.2020.02.042
Yang, Z. H., Chen, L. X., & Chen, Y. T. (2020). Cross-market contagion of economic policy uncertainty and systemic financial risk: A nonlinear network connectedness analysis. Economic Research Journal, 55(1), 67–83.
Zhang, C. S., & Liu, G. C. (2018). The investing and financing decision mechanism of the Chinese real sector: economic uncertainty and the financial constraints perspective. Economic Research Journal, 53(12), 51–67.
Zhang, X. Y., & Chen, L. Y. (2019). A study on the Spilover effect and its formation mechanism of economic policy uncertainty. Statistical Research Journal, 36(1), 115–128.
Angeloni, I., Faia, E., & Duca, M. L. (2015). Monetary policy and risk taking. Journal of Economic Dynamics and Control, 52, 285–307. https://doi.org/10.1016/j.jedc.2014.12.001
Antonakakis, N., Chatziantoniou, I., & Gabauer, D. (2019). Cryptocurrency market contagion: Market uncertainty, market complexity, and dynamic portfolios. Journal of International Financial Markets, Institutions and Money, 61, 37–51. https://doi.org/10.1016/j.intfin.2019.02.003
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024
Bloom, N. (2014). Fluctuations in uncertainty. Journal of Economic Perspectives, 28(2), 153–176. https://doi.org/10.1257/jep.28.2.153
Borio, C., & Zhu, H. (2012). Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism? Journal of Financial Stability, 8(4), 236–251. https://doi.org/10.1016/j.jfs.2011.12.003
Brownlees, C., & Engle, R. F. (2017). SRISK: A conditional capital shortfall measure of systemic risk. The Review of Financial Studies, 30(1), 48–79. https://doi.org/10.1093/rfs/hhw060
Bruno, V., & Shin, H. S. (2015). Capital flows and the risk-taking channel of monetary policy. Journal of Monetary Economics, 71, 119–132. https://doi.org/10.1016/j.jmoneco.2014.11.011
Caggiano, G., Castelnuovo, E., & Figueres, J. M. (2020). Economic policy uncertainty spillovers in booms and busts. Oxford Bulletin of Economics and Statistics, 82(1), 125–155. https://doi.org/10.1111/obes.12323
Cai, Y. (2018). Predictive power of US monetary policy uncertainty shock on stock returns in Australia and New Zealand. Australian Economic Papers, 57(4), 470–488. https://doi.org/10.1111/1467-8454.12130
Chi, Q., & Li, W. (2017). Economic policy uncertainty, credit risks and banks’ lending decisions: Evidence from Chinese commercial banks. China Journal of Accounting Research, 10(1), 33–50. https://doi.org/10.1016/j.cjar.2016.12.001
Claeys, P. (2017). Uncertainty spillover and policy reactions. Ensayos sobre Política Económica, 35(82), 64–77. https://doi.org/10.1016/j.espe.2017.01.003
Colombo, V. (2013). Economic policy uncertainty in the US: Does it matter for the Euro area? Economics Letters, 121(1), 39–42. https://doi.org/10.1016/j.econlet.2013.06.024
Dixit, A., Pindyck, R. S., & Sødal, S. (1999). A markup interpretation of optimal investment rules. The Economic Journal, 109(455), 179–189. https://doi.org/10.1111/1468-0297.00426
Fang, Y. (2015). Analysis of bank risk-taking under the impact of monetary policy and real estate prices. The Journal of World Economy, (07), 73–98.
Fratzscher, M., & Straub, R. (2013). Asset prices, news shocks, and the trade balance. Journal of Money, Credit and Banking, 45(7), 1211–1251. https://doi.org/10.1111/jmcb.12050
Friedman, H. H., Whitney, J. E., & Szczesniak, A. S. (1963). The texturometer: A new instrument for objective texture measurement. Journal of Food Science, 28(4), 390–396. https://doi.org/10.1111/j.1365-2621.1963.tb00216.x
Gabauer, D., & Gupta, R. (2018). On the transmission mechanism of country-specific and international economic uncertainty spillovers: Evidence from a TVP-VAR connectedness decomposition approach. Economics Letters, 171, 63–71. https://doi.org/10.1016/j.econlet.2018.07.007
Gu, H. F., & Yu, J. J. (2019). China’s economic policy uncertainty and bank’s risk-taking. The Journal of World Economy, 42(11), 148–171.
Hao, W. Y., Wei, W., & Zhou, X. B. (2017). Research on the impact of economic policy uncertainty on bank risk-taking. Inquiry into Economic Issues, (2), 151–159.
Hau, H., & Rey, H. (2008). Home bias at the fund level. American Economic Review, 98(2), 333–338. https://doi.org/10.1257/aer.98.2.333
He, G. H., & Li, J. (2018). International risk-taking channel of capital flow. Economic Research Journal, 53(5), 146–160.
Ho, S. W., Zhang, J., & Zhou, H. (2018). Hot money and quantitative easing: The spillover effects of US Monetary policy on the Chinese Economy. Journal of Money, Credit and Banking, 50(7), 1543–1569. https://doi.org/10.1111/jmcb.12501
Husted, L., Rogers, J., & Sun, B. (2020). Monetary policy uncertainty. Journal of Monetary Economics, 115(11), 20–36. https://doi.org/10.1016/j.jmoneco.2019.07.009
Jiang, F. W., Guo, P., & Guo, Y. M. (2019a). The impacts of Federal Reserve’s monetary policy on Chinese asset prices. Journal of Financial Research, 467(5), 37–55.
Jiang, T. (2020). Spillover effect of US economic policy uncertainty: Evidence from syndicated loan in emerging economies. Finance and Trade Research, 31(2), 18–29.
Jiang, Y., Zhu, Z., Tian, G., & Nie, H. (2019b). Determinants of within and cross-country economic policy uncertainty spillovers: Evidence from US and China. Finance Research Letters, 31, 195–206. https://doi.org/10.1016/j.frl.2019.08.004
Jin, C. Y., & Zhang, L. (2017). The shocks of Federal Reserve’s monetary policy on China’s economy. China Industrial Economics, (1), 25–42.
Kaminsky, G. L., & Reinhart, C. M. (1998). Financial crises in Asia and Latin America: Then and now. The American Economic Review, 88(2), 444–448.
Kim, S. (2001). International transmission of US monetary policy shocks: Evidence from VAR’s. Journal of Monetary Economics, 48(2), 339–372. https://doi.org/10.1016/S0304-3932(01)00080-0
Korobilis, D. (2013). Assessing the transmission of monetary policy using time-varying parameter dynamic factor models. Oxford Bulletin of Economics and Statistics, 75(2), 157–179. https://doi.org/10.1111/j.1468-0084.2011.00687.x
Li, S. J., & Tian, G. Q. (2020). Bank competition and the bank risk-taking channel of monetary policy: Theoretical and empirical research. Management World, 36(4), 149–168.
Li, Z., Zhu, M. H., & Wen, B. H. (2021). The cross-country spillover effect of economic policy uncertainty and the working mechanism. Finance & Trade Economics, 42(1), 92–106.
Mishkin, F. S. (1995). Symposium on the monetary transmission mechanism. Journal of Economic Perspectives, 9(4), 3–10. https://doi.org/10.1257/jep.9.4.3
Ouyang, Z. G., He, F. M., & Xue, L. (2018). Economic policy uncertainty, dual-wheel drive and economic growth. Systems Engineering – Theory & Practice, 39(4), 986–1000.
Pastor, L., & Veronesi, P. (2012). Uncertainty about government policy and stock prices. The Journal of Finance, 67(4), 1219–1264. https://doi.org/10.1111/j.1540-6261.2012.01746.x
Peng, H. F., & Zhu, X. Q. (2019). Multiple arbitrage motives and shock effects of short-term capital flows: Dynamic analysis based on TVP-VAR. Economic Research Journal, 54(8), 36–52.
Phan, D. H. B., Iyke, B. N., Sharma, S. S., & Affandi, Y. (2021). Economic policy uncertainty and financial stability: Is there a relation? Economic Modelling, 94, 1018–1029. https://doi.org/10.1016/j.economd.2020.02.042
Yang, Z. H., Chen, L. X., & Chen, Y. T. (2020). Cross-market contagion of economic policy uncertainty and systemic financial risk: A nonlinear network connectedness analysis. Economic Research Journal, 55(1), 67–83.
Zhang, C. S., & Liu, G. C. (2018). The investing and financing decision mechanism of the Chinese real sector: economic uncertainty and the financial constraints perspective. Economic Research Journal, 53(12), 51–67.
Zhang, X. Y., & Chen, L. Y. (2019). A study on the Spilover effect and its formation mechanism of economic policy uncertainty. Statistical Research Journal, 36(1), 115–128.