Monetary Policy Transmission in Systemically Important Economies and China’s Impact

This paper examines the monetary policy transmission mechanism in four systemically
important economies. The impact of monetary policy is found to be broadly comparable
for China, the US, the Eurozone, and Japan. Identifying a role for the financial sector is
essential to unpacking various channels through which monetary policy operates. Global
factors play a significant role and their impact is strongest for China and weakest for
Japan. China’s impact is significant with the Eurozone displaying the most
interdependence and Japan the least. Time-varying VARs suggest that contrasts in the
responses to monetary policy shocks persist highlighting some of the remaining
differences in the transmission mechanism. Finally, there is no apparent structural
change in the estimated relationships around the time when the Fed intervened after
2008. It is conjectured that Quantitative Easing may well have prevented such a break.