The Spillover Impact of US Monetary Policy Shock on China’s Economy

This study examines the spillover effects of US monetary policy shocks on China’s

economy, with a particular focus on regional heterogeneity. Using high-frequency

identification techniques with external instruments following the Gertler-Karadi method-

ology and Jord`a’s local projection framework, I analyze how US monetary policy

shocks propagate through China’s economy at both national and provincial levels be-

tween 2002-2012. Drawing on comprehensive national indicators and provincial-level

variables, I uncover significant regional variation in responses to external shocks. The

findings reveal that despite heterogeneous magnitudes, most provinces follow similar

temporal sequences in their responses, suggesting common underlying macroeconomic

adjustment processes operating through regionally distinct economic structures. Pro-

ducer prices consistently show 2-3 times larger responses than consumer prices across

all regions, indicating they serve as the primary absorption mechanism for external

monetary shocks. The observed pattern of regional responses is consistent with the

interpretation that economic structure—particularly manufacturing intensity, finan-

cial market development, and trade integration—plays a more important role than

geographic location in determining a region’s sensitivity to global monetary condi-

tions. These findings have important implications for policymakers seeking to design

region-specific responses to external shocks and contribute to our understanding of

international monetary policy transmission in a regionally diverse economy.