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Banking and the Macroeconomy in China: A Banking Crisis Deferred?

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

No E2013/5, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: The downturn in the world economy following the global banking crisis has left the Chinese economy relatively unscathed. This paper develops a model of the Chinese economy using a DSGE framework with a banking sector to shed light on this episode. It differs from other applications in the use of indirect inference procedure to test the ?tted model. The model finds that the main shocks hitting China in the crisis were international and that domestic banking shocks were unimportant. However, directed bank lending and direct government spending was used to supplement monetary policy to aggressively offset shocks to demand. The model finds that government expenditure feedback reduces the frequency of a business cycle crisis but that any feedback effect on investment creates excess capacity and instability in output.

Keywords: DSGE model; Financial Frictions; China; Crises; Indirect Inference (search for similar items in EconPapers)
JEL-codes: E3 E44 E52 C1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-tra
Date: 2013-04
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Journal Article: Banking and the Macroeconomy in China: A Banking Crisis Deferred? (2014) Downloads
Working Paper: Banking and the Macroeconomy in China: A Banking Crisis Deferred? (2013) Downloads
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