FOEs and the transmission of US monetary policy shocks: Evidence from China

The transmission mechanisms of global liquidity shocks have garnered significant attention, particularly in the context of emerging market economies. This study contributes to this literature by empirically examining a novel household income channel through which foreign-owned enterprises (FOEs) propagate US monetary policy shocks to host countries. Leveraging a large Chinese individual-level survey dataset, we uncover a hitherto understudied mechanism linking external monetary tightening to income dynamics in the private sector. Tightening US monetary policy shocks exhibit a significantly larger contractionary effect on individuals employed in FOEs relative to those in non-FOEs. These spillover effects are more pronounced for individuals working in industries with greater external financial dependence and in provinces with less developed financial sector. Moreover, the income dampening effect of US monetary policy shocks through FOEs affects household consumption, and households with greater financing constraints are more prominently affected. Our paper provides new insights into how FOEs act as transmission intermediaries for external liquidity shocks, affecting the host country’s economy.