China’s Monetary Policy and the Loan Market: How Strong is the Credit Channel in China?

Max Breitenlechner () and Riikka Nuutilainen ()
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Max Breitenlechner: University of Innsbruck
Riikka Nuutilainen: Bank of Finland Institute for Economies in Transition (BOFIT)

Open Economies Review, 2023, vol. 34, issue 3, No 5, 555-577

Abstract: Abstract We study the macroeconomic relevance of credit supply effects in the transmission of Chinese monetary policy. Using combinations of zero and sign restrictions in a structural vector autoregressive framework, we simultaneously identify monetary policy shocks and supply dynamics in the loan market. Our results show that policy shocks which coincide with loan supply effects account for roughly 60% of the overall effects of policy induced output dynamics. Moreover, we find that it takes roughly one year that banks adjust their lending strategies and loan supply effects unfold completely. Overall, our results provide robust empirical evidence that the credit channel constitutes an important and economically relevant transmission channel for monetary policy in China.

Keywords: China; Monetary Policy; Credit Supply; Structural Vector Autoregression; Zero and Sign Restrictions; C32; E44; E52 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11079-022-09705-2

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