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Spillover Effects of US Balance-Sheet Normalization Program on Financial Markets of China and US

Research paper by Zaiqiang HUO, Yueyang SU

Indexed on: 20 Dec '18Published on: 26 Jun '18Published in: Management Science and Engineering



Abstract

The strong spillover effects of an US balance sheet normalization program are estimated by our research, which will reduce its securities holdings by decreasing its reinvestment of the principal payments it receives from securities held in the System Open Market Account. Using financial data and analyzing graphs, we find that program might put pressure on its liquidity, motivate foreign capital back to US, have some impact on stock and bond markets, and surely influence emerging market economies. China, who plays one of important roles of emerging market economies, should take active and advanced measures and supervise the possible devaluation pressure on RMB and the recession in domestic bond market in order to prevent capital outflows.