The Spillover Effects of Chinese Shocks on the Belt and Road Initiative Economies: New Evidence Using Panel Vector Autoregression

Abstract

This paper investigates the spillover effects of Chinese real and monetary sector shocks on
the Belt Road Initiative (BRI) economies. The study adopted a panel vector autoregression (PVAR)
estimation technique to analyse the dynamic propagation of Chinese shocks in the real sector (gross
domestic product (GDP) and trade openness (OPEN)) and monetary sector (nominal interest rate
(NIR)) for a sample of 50 BRI countries from 2000 to 2017. The main results revealed that Chinese
income shocks positively spill over to all macroeconomic variables except BRI countries’ consumer
price index (CPI). However, the Chinese trade openness shock only has a temporary positive spillover
to BRI international trade and a temporary negative spillover on its monetary policy. In addition,
the Chinese monetary policy shock has a negative spillover on GDP and a positive spillover on CPI
in BRI economies. Chinese shocks, however, do not constitute a significant source of variation in
any interest variable. As explained by the Chinese income shock, the BRI interest rate is the highest
percentage of variable variation accumulated over time. Further, the highest variation of Chinese
trade shock is BRI trade openness, and lastly, the highest variation of Chinese interest rate shock is
CPI in BRI economies. The beggar-thy-neighbour effect may dominate the positive trade effect and is
a negative impact of the Chinese shocks. Hence, BRI economies should alleviate the adverse shocks
since the upcoming rapid growth from the Chinese has disturbed the BRI economies. Our results
reveal the importance of Chinese development on BRI partners’ economies and the significance of
Chinese shocks in real and monetary sectors in assisting policymakers in designing international and
monetary policy for BRI economies.