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Shadow banks, banking policies and China’s macroeconomic fluctuations

Vo Phuong Mai Le, Kent Matthews, David Meenagh, A. Patrick Minford and Zhiguo Xiao

Journal of International Money and Finance, 2021, vol. 116, issue C

Abstract: This paper develops a model of the Chinese economy using a DSGE framework that accommodates a banking sector and money. The model is used to shed light on the period of the Global Financial Crisis. It differs from other applications in the use of Indirect Inference to estimate and test the model. Officially mandated bank lending and government spending were used to supplement monetary policy to aggressively offset shocks to demand. This paper examines the efficacy of monetary policy in terms of the reduction in the frequency of severe economic slowdowns. We find that monetary policy can be used more vigorously to stabilise the economy, making direct banking controls and fiscal activism unnecessary. A nominal GDP targeting monetary policy is the most efficient, compared with a conventional Taylor Rule, a Friedman rule or a price level targeting rule.

Keywords: DSGE model; China Shadow banking; Severe economic slowdowns; Indirect inference; Monetary policy (search for similar items in EconPapers)
JEL-codes: E3 E44 E52 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jimonfin.2021.102415

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