Impacts of Monetary Stimulus on Credit Allocation and Macroeconomy: Evidence from China

Kaiji Chen, Patrick Higgins, Daniel Waggoner and Tao Zha

No 2016-9, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: We develop a new empirical framework to identify and estimate the effects of monetary stimulus on the real economy. The framework is applied to the Chinese economy when monetary policy in normal times was switched to an extraordinarily expansionary regime to combat the impact of the 2008 financial crisis. We show that this unprecedented monetary stimulus accounted for as high as a 4 percent increase of real gross domestic product (GDP) growth rate by the end of 2009. Monetary transmission to the real economy was through bank credit allocated disproportionately to financing investment in real estate and heavy industries. Such an asymmetric credit allocation resulted in the persistently high investment rate and debt-to-GDP ratio. Our findings provide a broad perspective on a tradeoff between short-run GDP growth and longer-run accumulated debt in response to large monetary interventions.

Keywords: asymmetric credit allocation; endogenous regime switching; debt-to-GDP ratio; heavy GDP; heavy loans; real estate; land prices; GDP growth target; nonlinear effects (search for similar items in EconPapers)
JEL-codes: C13 C3 E02 E5 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2016-09-01
New Economics Papers: this item is included in nep-cna, nep-fdg, nep-mac, nep-mon and nep-tra
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Citations: View citations in EconPapers (19)

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Working Paper: Impacts of Monetary Stimulus on Credit Allocation and the Macroeconomy: Evidence from China (2016)
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