Hot Money and Quantitative Easing: The Spillover Effects of U.S. Monetary Policy on the Chinese Economy

Abstract We develop a factor‐augmented vector autoregression (FA‐VAR) model to estimate the effects that unanticipated 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.