Macroeconomic consequences of the real-financial nexus: Imbalances and spillovers between China and the U.S

•Interactions exist between Chinese and US monetary policies: spillovers from the latter to the former are found.•Vector autoregressions and factor augmented vector autoregressions methodologies are employed.•Financial sector shocks in addition to real shocks are considered.•The monetary transmission mechanism in China resembles that of the U.S.•PBOC monetary policy slightly mitigated the business cycle peak before the crisis and slightly dampened post-crisis. Relying on quarterly data since 1998 we estimate, for China and the U.S., small scale econometric models that economize on the number of variables employed and yet are rich enough to provide useful insights about spillover effects between the two countries under different maintained assumptions about the exogeneity of the macroeconomic relationship between them. We conclude that inflation in China responds to credit shocks. Indeed, the monetary transmission mechanism in China resembles that of the U.S. even if the channels through which monetary policy affects their respective economies differ. We also find that the monetary policy stance of the PBOC was helpful in mitigating the impact of the 2008–9 global financial crisis on China's financial conditions. Finally, spillovers from the U.S. to China are significant and originate from both the real and financial sectors of the U.S. economy.