Cross-border transmission effect of China's monetary policy on the exchange rate of Asia-Pacific economies

This research examines whether China's monetary policy influences the main foreign exchange markets in the Asia-Pacific (AP) region through two main arguments. First, the impact of monetary policy on AP foreign exchange markets is subject to the stances of said policy. The foreign exchange rate should react differently between relatively loosening and tightening policy regimes. Second, the stances of monetary policy should be flexible instead of using the traditional way for expansionary and contractionary dichotomies. This research analyzes the transmission of China's monetary policy on the exchange rates of 12 AP economies via quarterly data spanning 1999–2020. We adopt a time-varying threshold regression method proposed by Yang et al. (2021) to reflect the stances of China's policy. We find that 11 out of 12 exchange rates in the region are significantly affected by China's monetary policy. The evidence is insufficient when applying a linear model or fixed threshold model. For most AP foreign exchange markets, China's monetary policy delivers asymmetric effects in which a relatively loosening money supply stance and a tightening rediscount rate stance generate larger cross-border effects.