The Nexus of Monetary Policy and Shadow Banking in China

Kaiji Chen, Jue Ren and Tao Zha

No 23377, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We estimate the quantity-based monetary policy system in China. We argue that China's rising shadow banking was inextricably linked to banks' balance-sheet risk and hampered the effectiveness of monetary policy on the banking system during the 2009-2015 period of monetary policy contractions. By constructing two micro datasets at the individual bank level, we substantiate this argument with three empirical findings: (1) in response to monetary policy tightening, nonstate banks actively engaged in intermediating shadow banking products; (2) these banks, in sharp contrast to state banks, brought shadow banking products onto the balance sheet via risky investments; (3) bank loans and risky investment assets in the banking system respond in opposite directions to monetary policy tightening, which makes monetary policy less effective. We build a theoretical framework to derive the above testable hypotheses and explore implications of the interaction between monetary and regulatory policies.

JEL-codes: E02 E5 G11 G12 G28 (search for similar items in EconPapers)
Date: 2017-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cna, nep-mac, nep-mon and nep-tra
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Citations: View citations in EconPapers (15)

Published as Kaiji Chen & Jue Ren & Tao Zha, 2018. "The Nexus of Monetary Policy and Shadow Banking in China," American Economic Review, vol 108(12), pages 3891-3936.

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