Work

Impacts of Monetary Stimulus on Credit Allocation and the Macroeconomy: Evidence from China

Year: 2016

Type: report

Abstract: We develop a new empirical framework to identify and estimate the effects of monetary stimulus on the real economy.The framework is applied to the Chinese economy when monetary policy in normal times was switched to an extraordinarily expansionary regime to combat the impact of the 2008 financial crisis.We show that this unprecedented monetary stimulus accounted for as high as a 4% increase of real GDP growth rate by the end of 2009.Monetary transmission to the real economy was through bank credit allocated disproportionately to financing investment in real estate and heavy industries.Such an asymmetric credit allocation resulted in the persistently high investment rate and debt-to-GDP ratio.Our findings provide a broad perspective on a tradeoff between short-run GDP growth and longer-run accumulated debt in response to large monetary interventions.

Source: National Bureau of Economic Research

DOI: 10.3386/w22650

Authors: Kaiji Chen, Patrick Higgins, Daniel Waggoner, Tao Zha

Institutions: Federal Reserve Bank of Atlanta, International Monetary Fund, National Bureau of Economic Research, Emory University

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: green

Funders: National Science Foundation, Princeton University, National Natural Science Foundation of China