Hot Money and Quantitative Easing: The Spillover Effects of U.S. Monetary Policy on Chinese Housing, Equity and Loan Markets

Abstract

We develop a factor-augmented vector autoregression (FA-VAR) model to estimate the effects that unexpected changes in U.S. monetary policy and economic policy uncertainty have on the Chinese housing, equity, and loan markets. We find the decline in the U.S. policy rate since the Great Recession has led to a significant increase in Chinese housing investment. One possible reason for this effect is the substantial increase in the inflow of "hot money" into China. The responses of Chinese variables to U.S. shocks at the zero lower bound are different from those responses in normal times. zhouh@pbcsf.tsinghua.edu.cn. We thank Serena Ng and Jushan Bai for helpful comments on the methodology. We are grateful to two anonymous referees and editor Pok-Sang Lam, whose comments have greatly improved the paper. We also thank Mark Wynne, Donald Kohn, Canlin Li (discussant), Hongyi Chen, Jianfeng Yu, and Jian Wang for helpful comments and feedbacks. We are also grateful for the participants at CICF 2015 for kind suggestions. The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System.

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