Corporate investment and the dilemma of the monetary policy: Evidence from China

Jianjun Wan and Chien-Chiang Lee ()

Economic Analysis and Policy, 2023, vol. 78, issue C, 106-121

Abstract: This research examines the role of corporate investment inefficiency and abnormal investment behaviors on the effectiveness of monetary policy in China’s transitional economy during 2001–2017. Using panel data regression models, we explore corporate investment inefficiency and its response to money supply and interest rates. We find that firms tend to overinvest and react abnormally to interest rates. Overall, the interest rate transmission mechanism is hindered and monetary policy becomes muddled. Our finding suggests that regulating the money supply or interest rates cannot help in coping with the dilemma between economic and financial stability until extensive financial reforms are made. Finally, we draw implications for overall financial reforms.

Keywords: Inefficient investment; Monetary policy; Government intervention; State-owned enterprises; China’s economy (search for similar items in EconPapers)
JEL-codes: E42 E52 P31 P34 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:78:y:2023:i:c:p:106-121

DOI: 10.1016/j.eap.2023.03.002

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