International Financial Crisis: Expectation Transmission and Policy Synchronisation

Monetary Policy Committee Discussion Papers of the People's Bank of China, 2020

36 Pages Posted: 28 Apr 2020

See all articles by Guofeng Sun

Guofeng Sun

Research Institute of People's Bank of China; Economics Department of Princeton University

Wenzhe Li

Tsinghua University, PBC School of Finance; The People's Bank of China (PBC)

Qiong Liu

The People's Bank of China (PBC)

Chunyi Zhang

The People's Bank of China (PBC)

Jingxuan Song

The People's Bank of China (PBC)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2, 2020

Abstract

In recent years, the economic and financial linkages of major economies have become intertwined, and the cross-market contagion effect of the global financial crisis has become more apparent. This paper mainly studies the expectation transmission and policy synchronization in international financial crisis, netting out influence of fundamental-based factors. Contributions of this paper are two folds. First, we innovatively calculate and utilize expectation gap and policy gap. We apply Taylor Rule regression to different expectation and monetary policy stance variables, and uses respective residuals as expectation gap and policy gap. We measure expectation transmission and policy synchronization by correlation of expectation gap/policy gap between originating economy and affected economies. Second, we innovatively propose financial accelerator in open economy and Taylor Rule augmented by international factors as respective theoretical basis of expectation transmission and policy synchronization. Our empirical study covers four international financial crises and 24 economies, and finds that expectation transmission and policy synchronization are generally significant in the four crises. Transmission efficiency varies because of financial openness, financial stability and regional integration. Economic weight of the originating economy also exerts influences. These results convincingly support the theoretical analysis in this paper. Based on above results, this paper proposes relevant policy recommendations, such as to strengthen expectation management,to strike balance between domestic and international equilibrium, and to strengthen international macroeconomic-policy coordination.

Keywords: International Financial Crisis Shock; Expectation Transmission; Policy Synchronisation; Taylor Rule; Financial Accelerator

JEL Classification: E52; F42; F65

Suggested Citation

Sun, Guofeng and Li, Wenzhe and Liu, Qiong and Zhang, Chunyi and Song, Jingxuan, International Financial Crisis: Expectation Transmission and Policy Synchronisation (April 2, 2020). Monetary Policy Committee Discussion Papers of the People's Bank of China, 2020, Available at SSRN: https://ssrn.com/abstract=3567530 or http://dx.doi.org/10.2139/ssrn.3567530

Guofeng Sun (Contact Author)

Research Institute of People's Bank of China ( email )

No.32 Chengfang Street
Beijing, Beijing 100800
China

Economics Department of Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

Wenzhe Li

Tsinghua University, PBC School of Finance ( email )

No. 43, Chengdu Road, Haidianqu
Beijing, 100083
China

The People's Bank of China (PBC) ( email )

No.32 Chengfang Street, Xichengqu
Beijing, 100800
China

Qiong Liu

The People's Bank of China (PBC)

No.32 Chengfang Street
Xi Cheng, Beijing 100800
China

Chunyi Zhang

The People's Bank of China (PBC)

No.32 Chengfang Street
Xi Cheng, Beijing 100800
China

Jingxuan Song

The People's Bank of China (PBC)

No.32 Chengfang Street
Xi Cheng, Beijing 100800
China

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