Financial Shocks, Deleveraging and Macroeconomic Fluctuations in China

Zhuang Ziguan, Zou Jinbu and Liu Dingming ()
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Zhuang Ziguan: Professor of the School of Finance of Zhongnan University of Economics and Law Wuhan, China
Zou Jinbu: PhD Candidate of Economics and Management School of Wuhan University Wuhan, China
Liu Dingming: Associate Professor and Doctoral Supervisor of the Wang Yanan Institute for Studies in Economics, Xiamen University Wuhan, China

China Finance and Economic Review, 2022, vol. 11, issue 3, 23-45

Abstract: To deleverage is one of the major tasks for the supply-side structural reform in China, and to steadily deleverage in order is the key to fending off and defusing financial risks. This paper uses the economic statistics of China around 2016 to depict the “expansion–contraction” fluctuations with Chinese macroeconomy during the deleveraging. In this realistic context, it constructs a financial business cycle model based on the financial accelerator theory and attempts to use default cost changes to introduce financial shocks and understand China’s macroeconomic fluctuations in the deleveraging context in the perspective of unanticipated and anticipated shocks. Results of the numerical model simulation show that before and after the deleveraging, the fluctuations of credit, leverage ratio, credit spread and other major macroeconomic variables originate not only from the changes with unanticipated default cost. Anticipated changes with default cost can similarly explain the “expansion–contraction” macroeconomic fluctuations in recent years and offer a new perspective into the fluctuations during deleveraging. Accordingly, government, when practicing deleveraging policies, is advised to take into full consideration not only the actual changes with default cost, but also anticipated factors of financial institutions.

Keywords: default costs; deleveraging; financial shocks; anticipated shocks (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:cferev:v:11:y:2022:i:3:p:23-45:n:3

DOI: 10.1515/cfer-2022-0015

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