Can debt monetisation be helpful for China s post-Covid recovery? Some empirical evidence

Ziyi Cao and Zhirong Ou

No E2021/5, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: A measure of the degree of debt monetisation is constructed for its impact on the business cycle to be studied in a standard VAR model. Debt monetisation is hardly expansionary, as it raises public demand that crowds out almost as much demand from the private sector. However, it generates in ation, presumably because of in ationary expectations. Nevertheless the impact of debt monetisation on the business cycle dynamics is trivial, due to the low e ciency of the monetary transmission mechanism. Unless policy proposals are for extraordinarily aggressive moves, or they are accompanied by monetary reforms which facilitate monetary transmission, the recent debate on debt monetisation, we argue, possesses more theoretical meaning than practical meaning for China s post-Covid recovery.

Keywords: Debt monetisation; business cycle; VAR; China (search for similar items in EconPapers)
JEL-codes: E31 E32 E63 H63 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2021-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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