The spillover effect of the Fed's emergency rate cut on China
summary
On September 19, 2024, after nearly two and a half years of interest rate hikes since March 2022 and the policy of maintaining high interest rates, the Federal Reserve decided to cut interest rates by 50 basis points and cut the federal funds rate to 4.75-5.00% in the face of slowing economic growth and falling inflation. In November of the same year, the Federal Reserve announced a second interest rate cut, continuing to reduce the target range of the federal funds rate by 25 basis points to between 4.50% and 4.75%. Looking back at the past 20 years, there have been six "unconventional" interest rate cuts in US history, mostly due to the impact of some major events. In addition, with the continuous strengthening of the trend of economic globalization, China has always insisted on opening the door to the outside world wider and wider, the reform of the exchange rate market has been continuously promoted and deepened, and the trade dependence with other countries has been increasing day by day. The United States is still the world's largest economy, and its economic and trade exchanges with China are becoming increasingly close, and the impact of changes in its monetary policy on China's economy through the international capital market and trade activities is becoming more and more difficult to ignore. The purpose of this paper is to explore the spillover effect of the Fed's emergency interest rate cut on China's economic output, and further divide it into trade channels, interest rate channels, and asset price channels to study the transmission mechanism of the impact of the Fed's interest rate cut on China's output, and conclude that the Fed's interest rate cut has a spillover effect on China's output, but the impact is relatively limited, and the spillover effect gradually weakens in the long run. China will continue to vigorously develop and support the real economy by cutting the reserve requirement ratio and interest rates according to its national conditions, be vigilant against the sharp inflow of hot money, continue to promote the internationalization of the renminbi, and continue to vigorously develop and support the real economy, consolidate the fundamentals of China's economy, enhance the ability to resist external risks, and reduce the adverse impact of the Fed's interest rate cut on China's economic output.
Keywords: Fed rate cut; Chinese output; trade channels; interest rate channels; Asset price channel
directory
Chapter 1 Introduction
1.1 Background and implications
1.1.1 Background
1.1.2 Implications for research
1.2 Basic underlying conduction logic
1.3 Research content, methods and technical routes
1.3.1 Research content
1.3.2 Research Methodology
1.3.3 Technical Roadmap
1.4 Innovations and shortcomings
1.4.1 Innovation
1.4.2 Possible deficiencies herein
Chapter 2: Theoretical Analysis of the Spillover Effect of Fed Rate Cuts on China
2.1 An overview of the Fed's previous emergency interest rate cuts
2.1.1 First round of interest rate cuts
2.1.2 Second round of interest rate cuts
2.1.3 The third round of interest rate cuts
2.1.4 Fourth round of interest rate cuts
2.1.5 Fifth round of interest rate cuts
2.1.6 Summary of the five rounds of emergency interest rate cuts by the Federal Reserve
Chapter 3: The Transmission Mechanism of the Fed's Interest Rate Cuts on China's Output Spillovers
3.1 The transmission channel of the Fed's interest rate cut effect on China's output
3.1.1 Interest rate transmission path
3.1.2 International trade transmission paths
3.1.3 Asset price transmission path
3.1.4 Correlation analysis of trade, interest rates and asset transmission
3.2 The effectiveness of the Fed's monetary policy on the transmission of spillover effects in China
3.2.1 The status of the US dollar as a world currency
3.2.2 Closer trade cooperation between China and the United States
3.2.3 Internal Causes
Chapter IV: Conclusions and Recommendations
4.1 Conclusion
4.2 Policies and Recommendations
4.2.1 Strengthen the fundamentals of the economy
4.2.2 Strengthen the supervision of the capital market
4.2.3 Promote the internationalization of the RMB
4.2.4 Stabilize market expectations
prolegomenon
1.1 Background and significance
1.1.1 Research Background
In the past two decades, due to the impact of vicious crisis events, the Federal Reserve has made six emergency adjustments to reduce the federal funds rate. On October 15, 1998, as the Russian financial turmoil swept through and Long-Term Capital Management went bankrupt, market panic spread, liquidity was tight, and the Federal Reserve announced a 25 basis point rate cut, reducing the federal funds rate from 5.25% to 5.00%; On January 3, 2001, the Federal Reserve cut interest rates by 50 basis points to 6% as the previous year's tech bubble burst and sales and production weakened further, resulting in a decline in consumer confidence; On April 18, 2001, the risk of a weakening economy intensified and the Fed cut interest rates by 50 basis points to 4.5%; On September 17, 2001, the stock market fell sharply due to the "9/11" terrorist attack on the Pentagon in New York, which caused heavy losses to financial institutions, and the Federal Reserve announced a 50 basis point rate cut, and the federal funds rate fell to 3.00%. On January 22, 2008, the Federal Reserve announced a 75 basis point rate cut to reduce the federal funds rate from 4.25% to 3.50% as the stock market plummeted, the economic outlook weakened and downside risks to growth rose. On October 8, 2008, following the collapse of Lehman Brothers, recession fears, weakening economic activity and lower inflationary pressures, the Federal Reserve lowered the federal funds rate by 50 basis points to 1.50% from 2.00%.
The Fed has cut interest rates several times in response to risk events in its history, on the one hand, releasing liquidity and stimulating the United States
economy, but also led to the widening of the interest rate gap between China and the United States, and the RMB exchange rate has appreciated pressure on domestic monetary policy
Relaxation and international coordination have certain implications. In this context, this paper expounds and demonstrates the role and impact of the Fed's monetary policy adjustment on China's output from the theoretical level, and studies the mechanism of the impact of the US monetary policy adjustment on China's economy from different transmission pathways. In addition, the Fed's federal funds rate is fluctuating all the time, and the small fluctuation of the Fed's interest rate caused by the equilibrium of the money market is ignored here, so the interest rate cut in this paper refers to a large emergency interest rate cut, that is, when the Fed interest rate has fallen significantly, the spillover effect of the Fed's interest rate cut on China's output is studied.
1.1.2 Research implications
In today's era of economic globalization, the economic ties of various countries are getting closer and closer. The United States is the world's number one economy
As the world's largest and most comprehensive developing country, China is opening up to the outside world to a greater extent, the scale of trade interaction with the United States has increased year after year, and the flow of capital between the two countries is very frequent, so changes in monetary policy such as emergency interest rate cuts in the United States are bound to have externalities to China's economy through international transmission.
Prevent major economic fluctuations, correctly judge the impact of international factors on the economy, and respond to them in a timely manner
Measures and the formulation of macroeconomic regulation and control directions are of great significance to maintaining the healthy and stable operation of China's macroeconomy. By studying the different transmission channels after the United States took emergency interest rate cut measures, we can accurately grasp the impact of the federal funds rate on China's economy, and provide some reference suggestions for China to cope with international policy shocks and realize the healthy and stable development of China's macroeconomy, so it is of great significance to study the impact of the Fed's emergency interest rate cut on China's output.
1.2 Basic underlying conduction logic
From the perspective of the transmission mechanism, some scholars have explained the channels through which a country's monetary policy ultimately affects the economy and output of other countries. (1) A country's monetary policy will advance by influencing the supply and demand of the domestic product market
and indirectly transmitted to the product market of other countries, or through the monetary policy of one country to the currency market of other countries,
Ultimately influencing the output of other countries; (2) The Fed's change in interest rate level affects the supply of US dollars in the international market, and the value of the US dollar changes, the relative value of the RMB changes, and the volume of China's export trade to the United States changes relatively, which in turn affects China's output level; (3) U.S. monetary policy affects the investment in China's real estate industry by affecting the financing cost of real estate developers in the United States; (4) The international transmission of the Fed's monetary policy ultimately affects China's output by acting on China's money supply: first, the Fed's monetary policy will affect the RMB exchange rate, and the People's Bank of China regulates the supply of money in order to stabilize the exchange rate, and China's output changes accordingly; Second, after the Fed adjusts its monetary policy, it will change China's interest rate differentials, and the People's Bank of China will control the inflow and outflow of speculative capital, which will change the money supply accordingly, and China's output will change accordingly. The third is that the Fed's monetary policy affects import prices by changing the prices of bulk commodities, which in turn will exert upward or downward pressure on domestic prices. (5) The Fed's interest adjustment affects the transmission mechanism of cross-border capital flows, and the Fed can have spillover effects on cross-border capital flows through interest rates, exchange rates, and asset prices. Scholars have analyzed the international transmission path of a country's monetary policy from multiple perspectives, which provides a reference for the study of the spillover effect of the Fed on China's output, but generally does not analyze whether the US monetary policy can be effectively transmitted to China based on the actual basis of China and the United States.
1.3 Research content, methods and technical routes
1.3.1 Research content
This article is divided into four main parts.
The first part is the introduction. Clarify the background and research value of this paper, and compare scholars about American goods
This paper summarizes the transmission mechanism of monetary policy on China's spillover effect, and introduces the main ideas and framework of this paper.
It also explains where this paper is innovative and where there may be shortcomings.
The second part is to first review the emergency interest rate cuts that have occurred in the Fed's history for nearly 20 years, and then move on
The theory of the spillover effect of U.S. monetary policy, combined with the basis of reality, substitutes the Fed's interest rate cut, and analyzes the possible spillover response to China's output.
The third part introduces the transmission mechanism of the Fed's monetary policy adjustment on China's output, from trade to trade
The transmission pathway, the interest rate transmission pathway, and the asset price transmission path are started from three aspects, and combined with the current situation between China and the United States
This paper analyzes the effectiveness of U.S. monetary policy on the transmission of spillover effects to China.
Part IV is the conclusion and policy recommendations of this paper. This paper summarizes the above and puts forward some suggestions: maintaining the flexibility and effectiveness of monetary policy, consolidating economic fundamentals, continuing to strengthen the supervision of domestic and foreign capital flows, actively promoting the internationalization of RMB, and promoting the development of RMB exchange rate pricing in a direction that reflects more economic fundamentals. China should actively exert its subjective initiative and take appropriate and reasonable measures according to China's own national conditions, so as to avoid a situation in which China's economy will fluctuate greatly due to the Fed's interest rate cuts.
1.3.2 Research Methodology
This paper mainly adopts the method of theoretical analysis, using theoretical models to analyze the impact of a country's monetary policy changes on other countries, and then verifies and studies the degree to which China's output responds to the changes and shocks of the Fed's interest rates.
1.3.3 Technical route
Using Eviews, Stata and other software to analyze the correlation between the Fed's interest rate changes and crude oil exports, and the exchange rate of RMB against the US dollar, establish a mathematical model through correlation analysis, predict the Fed's interest rate cuts, put forward the possible trend and impact of DFF, and put forward reasonable suggestions.
1.4 Innovation and shortcomings
1.4.1 Innovation
This paper reviews the emergency interest rate cuts in the past two decades in the history of the United States, and then analyzes the spillover effects of the Fed's interest rate cut shocks from a theoretical perspective, which enriches the domestic research on the spillover effects of US monetary policy changes on China to a certain extent.
Second, the theme of this paper combines the Fed's "gradual" interest rate cut in 2024 and the hot spot of the Fed's emergency interest rate cut in the context of the new crown epidemic in 2020, and combines the Fed's emergency interest rate cut with China's economy.
1.4.2 Possible deficiencies in this article
First, the literature on the spillover effect of the Fed's emergency interest rate cut on China's economic output is limited at this stage, and the arguments put forward in this paper may be immature and need to be improved.
Second, subject to the availability of variables, the variables selected in this paper may not include those that affect the Fed's tightening
All the factors that affect the impact of the sharp interest rate cut on China's output affect the empirical effect.
A theoretical analysis of the spillover effect of the Fed's interest rate cut on China
With the acceleration of the trend of world economic integration, the United States is now the world's largest economy and its currency
Policy changes not only play a regulatory role in the U.S. economy, but also have an increasingly important impact on the economies of other countries.
Therefore, it is necessary to pay attention to the situation of large changes in the Fed's monetary policy, so this chapter begins with this
This section introduces the Fed's emergency interest rate cuts in the past 20 years and their background. From the theoretical level, the spillover effect of U.S. monetary policy on China not only provides theoretical support for the impact of the Fed's interest rate cut on China's output, but also lays a theoretical foundation for the analysis of the transmission mechanism of the Fed's interest rate cut on China's output in the following chapters.
2.1 An overview of the Fed's previous emergency interest rate cuts
2.1.1 The first round of interest rate cuts
2 In the 90s of the 20th century, the Russian economy was in a relatively sluggish stage, and the fiscal deficit was long-term
In order to cover the fiscal deficit, the Ross government has significantly increased the issuance of government bonds and borrowed from the international lending market. In December 1999, the Russian government was already in a serious state of insolvency, with total liabilities of up to $100 billion and assets of only nearly $30 billionThe Dow Jones fell as much as 11.5% in three days with a sharp depreciation of the currency, falling bond prices, heavy losses for countries that held a lot of Russian government bonds, and countries that borrowed money from Russia struggling to be repaid. On October 15, 1998, in order to stabilize the stock market and the economy, the Federal Reserve announced a 25 basis point reduction in the federal funds rate, from the original 5.25% to 5%, and a month later, the Federal Reserve continued to cut interest rates by 25 basis points on the basis of the last time, and the target rate of the federal funds rate was reduced to 4.75% to stimulate the recovery of financial markets after the debt crisis.
2.1.2 The second round of interest rate cuts
In 2000, the Internet speculation bubble burst, as can be seen from Figure 2.1, the NASDAQ index fell sharply from the all-time high of 5048 in March 2000, and the market value of the entire stock market evaporated by almost two-thirds. As can be seen from Figure 2.2, the unemployment rate in the United States began to rise sharply in December 2000, and the economic downturn was relatively high, indicating that it was negatively affected by the high-tech crisis. Therefore, in order to revive the stock market and the economy, on January 3, 2001, the Federal Reserve cut interest rates by 50 basis points to 6%, and as shown in Figure 2.2, the unemployment rate began to decline in April 2002, indicating that the effect of interest rate cuts to stimulate the economy and employment rate is beginning to be gradually felt. (Do you want a picture?) ）
2.1.3 The third round of interest rate cuts
Figure 2.3 shows that the Fed funds rate in the United States saw two significant rate cuts in 2001, the first of which was due to the further increase in the risk of economic weakness after the technology crisis, and on April 18, 2001, the Federal Reserve announced a 50 basis point cut in interest rates, bringing the interest rate level to 4.5%; The second interest rate cut occurred after the 9/11 terrorist attacks, when panic spread and the stock market plummeted, as can be seen in Figure 2.4, the impact of the 9/11 terrorist attacks on the impact of the US small business confidence index fluctuated wildly, reflecting to some extent the concern of companies about the market and the rising uncertainty of the market. On September 17, 2001, the Federal Reserve pledged to provide tremendous liquidity to the market by reducing the federal funds rate by 50 basis points to 3.00% in an effort to stabilize market panic and prevent the stock market from plunging further. (Fig).
2.1.4 The fourth round of interest rate cuts
The excessive boom in the subprime mortgage market has created a large bubble in the U.S. mortgage market. With the bursting of the bubble
The U.S. economy has been in a downturn for a long time since then, with a massive exodus of capital, a credit crunch, and heavy losses to financial institutions. At the beginning of 2008, Figure 2.5 shows that the U.S. GDP has begun to decline at an inflection point, the U.S. economy is in decline, the risk of recession is rising, and the economic outlook is not optimistic. On January 22 of the same year, the Federal Reserve announced that it would reduce the federal funds rate from 4.25% to 3.50%, a 75 basis point reduction in interest rates. On October 8, 2008, the collapse of the Lehman brothers further exacerbated market fears of a recession, economic activity weakened, and credit crunched, and the Federal Reserve announced a 50 basis point cut in the federal funds rate from 2.00% to 1.50% to increase liquidity in the market. Figure 2.6 shows that the unemployment rate began to increase sharply in April 2008, indicating that the negative impact of the financial crisis began to manifest itself, and it was not until October 2009 that the unemployment rate and GDP began to show a more obvious improvement, and the effect of interest rate cuts to stimulate the economy gradually began to appear, and the U.S. economy slowly embarked on the road to recovery. (Fig).
2.1.5 The fifth round of emergency interest rate cuts by the Federal Reserve
In February 2020, the new crown pneumonia epidemic broke out, the virus spread rapidly overseas, the spread momentum was not contained, but intensified, the market panic escalated, shareholders sold stocks in large quantities, and the stock market fell.
The volatility intensified, and as can be seen in Figure 2.7, the Dow Jones Industrial Average fell more than 1,000 points on multiple days.
A large number of enterprises have stopped production and work, causing huge concerns about the economic downturn in the market. The market is rising in risk aversion,
U.S. Treasury yields fell sharply, falling to less than 1%, a record low. (Picture)
In order to stabilize the panic in the market, promote economic recovery, and reinvigorate confidence in the U.S. financial market, reduce
Debt pressures on light businesses and households, increasing liquidity in the market, and minimizing the impact of the pandemic on the U.S. economy
On March 3, 2020, the Federal Reserve announced an emergency reduction in the federal funds target rate adjustment by 50 basis points. On March 15, the Fed announced another interest rate cut adjustment, which continued to fall by 100 basis points on the basis of the last time, and the interest rate fell from 1.25% to 0.25%, which is the largest adjustment to reduce the federal funds target rate announced by the Federal Reserve since the financial crisis, that is, the rate cut is the largest in nearly a decade. In addition, the Federal Reserve restarted its quantitative easing program and announced that it would purchase a large number of U.S. Treasury bonds and mortgage-backed securities, increasing its holdings by no less than $500 billion and $200 billion, respectively, to inject liquidity into the market and further enhance and stabilize market confidence in the economy.
2.1.6 Summary of the five rounds of emergency interest rate cuts by the Federal Reserve
As shown in Table 2.1, we can see that in the past 20 years, the Fed has had five rounds of emergency interest rate reductions, and when the impact is more serious, the Fed will even lower the interest rate twice to save the market when the effect of the first interest rate cut is not obvious. Summing up the triggers for interest rate cuts, we can conclude that most of the adjustments made by the US Federal Reserve in making emergency interest rate cuts are due to the outbreak of crises, the occurrence of vicious events, and the increased risk of economic downturn, which shows that the Fed's emergency interest rate cuts are not accidental and random adjustments, and they deserve our attention and attention. (Chart).
By comparing the magnitude of previous interest rate cuts, it is found that the range of interest rate cuts is mostly about 50 basis points, the lowest range of a single interest rate cut is 25 basis points, and the highest range of a single interest rate cut is as high as 100 basis points, which shows that the Fed's emergency interest rate cut is not enough to ignore the small range, which will not only drive the recovery of the US economy, but also have an impact on the economies of other countries cannot be ignored. It deserves attention and research.
The transmission mechanism of the Fed's interest rate cut on China's output spillovers
Through the review of previous emergency interest rate cuts in the previous chapter, we clarify the context and motivation of the Fed's interest rate cuts, and explore the transmission pathways of the Fed's interest rate cuts to China's output, which will help us to understand more clearly the ways in which the Fed's monetary policy acts on China's output. This part mainly explains the transmission path of the Fed's interest rate cut on China's output from three aspects: trade channel, interest rate channel and asset price channel, first introduces the mode and principle of each transmission channel, and then substitutes the Fed's interest rate cut to analyze the possible impact of the Fed's interest rate cut on China's output under each channel.
3.1 The transmission channel of the Fed's interest rate cut effect on China's output
3.1.1 Interest rate transmission pathway
The interest rate transmission channel refers to the impact of foreign monetary policy on domestic interest rates, which in turn leads to domestic consumption and
Mechanisms by which increased and decreased investment ultimately affect domestic output. When there is an inconsistency in interest rates between the two countries,
Capital flows from countries with low interest rates to countries with high interest rates, resulting in higher yields, up to both countries
The spread narrowed to non-existent. As shown in Figure 3.1, after the Fed cut interest rates, the interest rate differential between China and the United States increased, and dollar holders sold the dollar in pursuit of a relatively higher yield, and more and more profit-seeking capital was converted into RMB to enter the RMB market, the supply of RMB increased, and China's interest rates decreased, which gradually reduced or even disappeared the benefits of the interest rate differential between China and the United States. In addition, the reduction of interest rates in China will reduce the investment cost of Chinese enterprises and increase investment, and the reduction of interest rates in China will also reduce the debt pressure of consumers and promote the increase of consumption, both of which will increase China's output. (Figure 3.1).
After the Federal Reserve lowered the federal funds rate, profit-seeking capital gradually withdrew from the United States and invested in higher yields
real estate investment is also the preferred investment market for many foreign profit-seeking capital, mainly because of real estate
The rate of return of the real estate market is relatively high, and the recovery period is relatively short, which satisfies the speculative needs of foreign profit-seeking capital.
The real estate market plays a very important role in stimulating China's economy, so the Federal Reserve's monetary policy adjustment is very important to China
The impact of investment in the real estate market is also an important part of the spillover effect on China's output. But at the same time, it should
It should be vigilant to prevent excessive foreign profit-seeking capital from entering China's real estate market to form a real estate bubble
After the bursting of the bubble, it caused a shock in our economy. After the Federal Reserve cut interest rates, the interest rate differential between China and the United States further widened
In order to prevent the creation of a large number of bubbles, the central bank may reduce the money supply and increase interest rates, which in turn will reduce the medium
Domestically produced.
3.1.2 International trade transmission path
The trade channel is also known as the net export trade channel, and the foreign exchange market after the adjustment of interest rates by the monetary authorities of foreign countries
The supply and demand of foreign currencies change, and the price of foreign currencies in the foreign exchange market changes after the supply and demand reach equilibrium.
That is, the exchange rate of a foreign currency changes, and the relative exchange rate of the country changes in the opposite way. Under the condition that the sum of the elasticity of imports and exports is greater than 1, a decrease in the domestic exchange rate is beneficial to domestic exports, and a current account surplus, with an increase in net exports, increases the domestic output, and conversely, an increase in the domestic exchange rate favors foreign exports, and the domestic imports to foreign countries increase, the country's net exports decline, and the current account deteriorates, reducing domestic output. In short, monetary policy is the international transmission of trade by changing the size of the relative exchange rate, which in turn affects the volume of net exports.
Figure 3.2 depicts the international transmission path of the spillover effect of the Fed's interest rate cuts. The Federal Reserve cut interest rates, in the foreign exchange market, the yield of the dollar decreased, dollar holders began to sell their dollar holdings, the supply of the dollar in the foreign exchange market increased, the demand decreased, and finally the price of the dollar fell when the foreign exchange market reached equilibrium, that is, the dollar depreciated, and the RMB appreciated relatively, resulting in an increase in foreign currency that foreign countries need to pay when importing Chinese products, and imports to China decrease, and China's exports to foreign countries decrease, resulting in a current account deficit, and ultimately causing a decline in China's output level. (Figure 3.2).
Under the international transmission path of trade, the Fed's monetary policy adjustment can also affect the price of commodities
to influence our trade. The price of commodities is priced in US dollars, and the price of commodities after the Fed cuts interest rates
The rise in Georgia has led to a decline in imports to China, a decline in China's net exports, and a decline in China's output levels. Irrespective of
Whether the Fed cuts interest rates will affect commodity prices or the dollar exchange rate, ultimately on China's net exports
Impacts, and in the same direction, are negative effects.
In order to stabilize the exchange rate, China may implement an open market operation to buy government bonds, increase money supply, reduce market interest rates, stimulate the increase of household consumption and enterprise investment, and increase China's output.
3.1.3 Asset price transmission path
As shown in Figure 3.3, the international transmission mechanism of asset prices refers to the fact that changes in foreign monetary policies will cause capital flows between the two countries, which in turn will have an impact on domestic capital markets, further affecting domestic investment and consumption, and thus domestic output. The specific mechanism of influencing investment and consumption through asset price channels in China's capital market is further illustrated by two theories, namely the Q theory proposed and named by Tobin and the wealth effect theory proposed by Modigliani in 1971. (Figure 3.3).
1. Tobin's Q theory
The mechanism of influencing investment in the domestic capital market can be further explained by Tobin's Q theory, which believes that monetary policy changes can ultimately affect corporate investment by affecting stock prices. He defines the Q value is equal to the ratio of the market value of the enterprise to the replacement cost of the enterprise, and when the Q value is greater than 1, the enterprise will make an investment decision, at which time the market value of the enterprise is higher than the replacement cost of the enterprise, and the investment is valuable, on the contrary, the enterprise will not make an investment decision. And in the case of a Q value greater than 1, the larger the Q value, the greater the investment of the enterprise, because of Q When the value is large, the replacement cost of the enterprise is lower than the market value, and the cost of investment is lower than the market value, so the enterprise will increase investment and issue a small number of shares to purchase the fixed assets required by the enterprise. Therefore, when foreign monetary policy changes, capital will flow internationally, and the inflow or outflow of capital in the domestic capital market will affect the price of the capital market, while the price fluctuation of stocks will further affect the market value of the enterprise, and the Q value will change accordingly, affecting the investment decision of the enterprise, and ultimately affecting China's output. By combining Tobin's Q theory with the international transmission path of asset prices, it can more clearly reflect how foreign monetary policies affect corporate investment decisions and thus affect other countries' domestic outputs.
Therefore, the Federal Reserve will cut interest rates, and profit-seeking capital will flow out of the United States, and part of it will flow into China's capital market, China
The stock market heats up, the stock price rises, the market value of the enterprise increases, and the Q value increases, at this time the enterprise will
Increasing investment in investments that are less expensive relative to market capitalization, when corporate investment increases and China's output increases.
2. Wealth Effect Theory
The mechanism of influencing consumption in the domestic capital market can be further explained by the wealth effect theory, which refers to the fact that changes in monetary policy will affect stock prices, and stock prices can reflect changes in personal wealth, which in turn can be affected
Personal consumption ultimately affects the level of output in a country. Modigliani emphasizes that consumption refers to the non-durable
The consumption of consumer goods, which has nothing to do with the consumer's current income, but with the consumer's lifetime wealth, and stocks
The price of the ticket affects the consumer's lifetime wealth.
By combining the wealth effect theory with the international transmission path of asset prices, it can be explained more clearly
How foreign monetary policies affect consumption in other countries and thus output. The Fed's interest rate cut will make some countries
The entry of international capital into China's capital market has driven up the stock market stock price, and for individuals, the stock price
After the increase, selling stocks can be converted into capital gains, increasing one's lifetime wealth, lifelong wealth
The increase leads to an increase in consumer consumption of non-durable consumer goods, which in turn affects China's output.
3.1.4 Correlation analysis of trade, interest rates and asset transmission
Three representative types of products are selected from the trade channel, interest rate channel and asset price channel: China's crude oil export volume, RMB exchange rate against the US dollar, and China's stock market value for regression analysis of the US federal funds rate. First, we use Eviews to import crude oil export volume, US federal funds rate, RMB exchange rate against US dollar, and Chinese stock market value, and conduct correlation analysis to observe the US federal funds rateWhether there is a significant linear correlation with each variable.
Breaking down the correlation between the US federal funds rate and the RMB exchange rate against the US dollar, it is clear that the RMB exchange rate against the US dollar has a positive correlation with the fluctuation of the US federal funds rate.
Then there is the correlation analysis between the US federal funds rate and the turnover of China A-shares, which shows that there is also a certain correlation between the two. (If the difference in data values is too large, you can use the log function to reduce the data.) ）
Similarly, the correlation analysis between the US federal funds rate and the export volume of crude oil, one of China's commodities, is carried out (the net export value of crude oil in a given year is negative, but does not affect the overall graph shape).
It was found that there was still some correlation.
Therefore, these three are used as dependent variables to analyze the impact of China's crude oil exports, China's A-share trading volume, and the US dollar exchange rate on the US federal funds rate.
Next, an ordinary least squares (OLS) regression is performed (due to the lack of data from 2020 to 2024, the adjusted data is only 2004M12-2019M11).
It is surprising to find that Prob (F-statistic) is close to 0, which means that the overall significance of the regression model is very high, the model fits well, and the prediction effect of the independent variable on the dependent variable is significant The standard error of regression (S.E. of regression) was 0.95, and the average difference between the predicted value of the dependent variable and the actual observed value was small, indicating the fitting effect of the regression modelBetter. A coefficient of determination (R-squared) of 0.7 also accounts for 70% of the dependent variable variation and the remaining 30%. May be interpreted by errors or other factors not included. The establishment of the regression mathematical model not only draws out the different influencing factors of the US federal funds rate on trade, interest rates and assets, but also provides a reference for the future forecast of DFF and China's policy response (5.2).
3.2 The effectiveness of the Fed's monetary policy on the transmission of spillover effects in China
In the previous chapter, we argued that the Fed's interest rate cuts have spillover effects on China from the perspective of theoretical and data models, and the first section of this chapter further discusses the transmission channels through which the Fed has an impact on China's output.
3.2.1 The status of the US dollar as a world currency
As early as the 50s of the 19th century, in the Bretton Woods system, the double peg system can be seen that the US dollar was at the core of the monetary system at that time, and the currencies of various countries were pegged to the US dollar, and the US dollar was pegged to gold. This peg system makes it inevitable that all countries will be affected by the US dollar, and once there is a change in US monetary policy that affects the value of the US dollar, it will affect the exchange of gold by various countries, and then affect the economy. After the dissolution of Bretton Woods, the position of the US dollar in the world economy is still irreplaceable, and most countries still choose the US dollar as a safe-haven asset, invest in US Treasury bonds, use US dollars to denominate, and even dollarize countries.
After the reform and opening up, China's economic development has been rapidly improved, and the process of RMB internationalization
As shown in Figure 3.4 below, the US dollar has basically maintained more than 60% of the world's allocated foreign exchange reserves in the past six years, making it the currency with the largest proportion of global foreign exchange reserves, ahead of other currencies. Although the proportion of RMB has been increasing in recent years, the overall proportion is still less than 2.5%. The status of the renminbi is rising day by day, but it is undeniable that the US dollar is still the protagonist of the international currency, and the US dollar is still the most important foreign exchange reserve of other countries, including China. The dominant position of the US dollar also makes China use US dollar-denominated transactions in trade cooperation with other countries, so the impact of US monetary policy on the US dollar exchange rate will have an impact on these trade activities, and then affect the level of China's output. (Do you want to figure it or not).
3.2.2 Closer trade cooperation between China and the United States
Since the reform and opening up, China's economic growth has been getting faster and faster, and it has quickly become the world's second largest economy.
Import and export trade plays a very important role in stimulating China's economy, and China is rich in population base due to its large population
The human resources have also made our country a big manufacturing and exporting country. China continues to improve production technology, increase
Increase the competitiveness of export goods overseas, and carry out trade cooperation with more and more countries, trade volume and trading partners
More and more. The continuous growth of export trade has stimulated the innovation and reform of production technology in China's manufacturing enterprises.
Encourage enterprises to continuously improve their export products, improve the competitiveness of their export products, and change those that have been precipitated
Good technology will also benefit domestic enterprises, thereby improving the overall production capacity and manufacturing level of the country. In addition to this
In addition, the expansion of export trade also requires more manpower input, which also adds more jobs to the society.
To a certain extent, the pressure on domestic employment has been alleviated. It can be seen that among the three carriages that pull the economy, export trade
The meaning of easy is increasing day by day.
Nowadays, the trend of global economic integration is accelerating, and the greater the degree of China's opening to the outside world, the closer the trade relationship with the United States. The Chinese population is large, has an advantage in labor resources, and is mostly oriented to the United States
The export is the processed products with low added value, while the United States is leading in science and technology, has developed high-tech industries, and is multi-directional
China exports some high-tech products with heavy scientific and technological elements. China has been constantly improving its own high technology
level, to stimulate scientific and technological innovation, to transform into a scientific and technological power, to reduce dependence on the United States for imports and exports, but for now
Look, the two are still important trading partners for each other.
As shown in Figures 3.5 and 3.6, the overall trend of U.S. imports and exports to China has been steadily increasing since 1999 and in 2017 Affected by the Sino-US trade war, the import and export volume has declined, and with the gradual easing of the Sino-US trade war, Sino-US trade cooperation is still the general trend. Therefore, the adjustment of the monetary policy of the United States has caused changes in the value of the US dollar, affecting China's net exports and current account, and playing a role through trade channels to effectively affect China's output. (Do you want to figure it or not).
3.3.3 Internal Causes
The internal reasons are mainly introduced from China's own reasons. The first is that China's door to opening up is opening wider and wider
The market is becoming more and more open, with the introduction of the RQFII pilot and the abolition of qualified foreign institutional investors
(QFII) and Renminbi Qualified Foreign Institutional Investors (RQFIIs). When the U.S. monetary policy affects the relative exchange rate, a part of the profit-seeking capital can enter China's capital market and influence output through asset price channels. However, China should also be vigilant against the large inflow of foreign capital to prevent hot money from flowing out of China's capital market again in the future, causing greater turbulence in China's financial market.
Second, if the monetary authorities intervene too much in the exchange rate, or even adopt a fixed exchange rate system, then the United States
The monetary policy will not be able to effectively affect the relative exchange rate between China and the United States, and the trade transmission channel will fail. And our country continues to carry out one
A series of exchange rate reforms have promoted the pricing of exchange rates to continue to develop in a more reasonable direction, and China's exchange rate system is still in place
However, the exchange rate system is based on market supply and demand, so the U.S. monetary policy can effectively influence through the exchange rate channel
Produced in China. However, the monetary authorities will still intervene to maintain the exchange rate market if necessary
If the Federal Reserve adjusts its monetary policy by a large margin, China's monetary authorities will maintain the exchange rate market
stability, may take the initiative to adopt interest rates, monetary policy, etc., which will also affect domestic investment, consumption, etc., and ultimately affect China's output.
Chapter 5 Conclusions and Recommendations
5.1 Conclusion
This article takes the Federal Reserve's emergency and large interest rate cut as the background, and the U.S. federal funds rate as the measurement indicator
The RMB Real Effective Exchange Rate Index, the 7-day Interbank Offered Rate, and the China Shanghai Composite Index are used as transmissions
Analyzing the impact of the Fed's interest rate cut on China's output, the channel refers to the variables and draws the following conclusions:
First, China's output will indeed be affected by the Fed's interest rate cut shock, and the overall impact will be positive
The loudness is generally strong at the beginning and gradually weakens over time.
Second, under the various transmission channels, the impact of the Fed's interest rate cut on China's output is as follows: in the trade channel
Under the road, the Fed's interest rate cut has had a negative impact on China's output, while under the interest rate and asset price channel, the Midland
The reduction of interest rates has a positive effect on China's output, and the changes in final output should also take into account the impact of the three.
From the impulse response function of China's output to the Fed's interest rate cut under the full sample range, it can be seen that China's output has been hit positively and gradually weakened over time, indicating that the interest rate and asset price channels may play the first role, and the sum of the shock effects is greater than that of the trade channel. Over time, trade channels began to play a negative role in output, offsetting some of the positive effects of interest rates and asset price channels.
Third, the impact of the Fed's interest rate cut on China's output is generally limited and controllable, and China can also play a role
Subjective initiative to reduce the adverse impact of channel shocks on China's output and maintain a relatively stable finance
Environment.
5.2 Policies and Recommendations
By 3.14 to describe the spillover impact of changes in the U.S. federal funds rate on China, and to make future predictions to a certain extent.
(Missing data leads to non-linearity of line segments)
Combined with the modeling and theoretical analysis of the US federal funds rate forecast, we can more accurately grasp the potential impact of the Fed's interest rate cuts, and it is more conducive to dialectically proposing the targeted measures of the Fed's interest rate cuts. Although the impact of the Fed's interest rate cut on China's economy is generally limited, it is still necessary to be cautious about the Fed's relatively large monetary policy adjustment. It is still necessary to proactively maintain a relatively stable financial environment, and it is still of great significance to prevent major economic ups and downs.
To this end, the following suggestions are made:
5.2.1 Consolidate the fundamentals of the economy
Efforts should be made to consolidate the fundamentals of the economy, enhance the ability of China's economy to resist external risks, and strengthen the basic aspects of the economy to maintain economic stability. Formulate monetary policy flexibly and formulate a monetary policy that suits China's economy according to actual national conditions
economic development of interest rates and monetary policy, and we should not blindly follow the pace of the Federal Reserve's adjustment of monetary policy. For example, the eye
Before that, China's enterprises have basically fully resumed production and work, and the economy has begun to turn around after the epidemic has been basically controlled.
However, the downward pressure on the economy is still large, and based on this, we should consider continuing to cut the reserve requirement ratio and interest rates to promote China's output
and faster and better turnaround of the economy. At the same time, we must continue to vigorously support the real economy and solve the financing of small and micro enterprises
The problem of capital difficulties and financing difficulties should promote the healthy and dynamic development of the economy. Therefore, when formulating domestic policies, it should:
Prioritize domestic realities before minimizing the impact of U.S. interest rate adjustments.
5.2.2 Strengthen the supervision of the capital market
After the inflow of international capital into China, a part of it is invested in enterprises with development prospects and development potential in China.
Drive the development of enterprises, accelerate the progress of the industry, promote the technological innovation and upgrading of enterprises, and solve some enterprises
The problem of insufficient funds is also of great significance to Chinese enterprises, so China's capital market is also even more important
Increasing opening up will allow international capital to enter China and use it appropriately, which will ultimately boost economic and output growth. capital market
The opening up of the U.S. currency policy asset price channel is an important condition for making the U.S. currency policy asset price channel work, although at present, our country is external
But that doesn't mean we have a laissez-faire approach to capital inflows. For casting
We strongly support and welcome the inflow of capital capital, but we still have an attitude towards the inflow of speculative capital
We should be vigilant to prevent the massive inflow of these hot money into China's capital market to form a bubble and withdraw from it
The time has caused China's capital market to be shaken and triggered a crisis. Therefore, the identification and management of international capital should be strengthened.
Be vigilant against the risks brought to our country by profit-seeking capital. Continuously improve the capital market mechanism and design scientific capital flow
Risk early warning and feedback mechanism, learn from foreign advanced experience in cross-border capital flow risk management, and improve the pair
The level of risk management for cross-border capital flows.
5.2.3 Promote the internationalization of RMB
We will continue to promote the internationalization of the renminbi and promote the use of renminbi in economic exchanges with foreign countries
price and settlement, promoting the continuous improvement of the international status of the RMB; Continue to deepen the reform of the RMB exchange rate and promote
The RMB exchange rate pricing is developing in a more reasonable direction, reflecting more economic fundamentals and reducing the flock
Effect. While promoting the internationalization of the RMB, we should still pay attention to exchange rate fluctuations for export manufacturing enterprises
industry, and advocate that export enterprises sign long-term contracts with exporting countries and use financial derivatives such as futures and options
products to reduce the losses of export-related enterprises due to exchange rate fluctuations, so as to better maintain China's stability
Economy and output.
5.2.4 Stabilize market expectations
Stabilize market expectations, enhance the market's confidence in the economic adjustment ability of China's monetary authorities, and prevent micro entities from overreacting to the adjustment of US monetary policy, causing market panic, triggering the herd effect, and causing China's finance
The turbulence of the market is not conducive to the stability of the economy. China should rely more than just on the three magic weapons of monetary policy
output, we must continue to promote the innovation of monetary policy tools, increase the means of regulating and controlling the economy, and face external shocks
, the market can be fast, accurate and effective adjustment, enhance market confidence.