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

53 Pages Posted: 20 Sep 2016 Last revised: 22 May 2023

See all articles by Kaiji Chen

Kaiji Chen

Emory University - Department of Economics; Federal Reserve Bank of Atlanta

Patrick C. Higgins

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Daniel F. Waggoner

Federal Reserve Bank of Atlanta

Tao A. Zha

Federal Reserve Bank of Atlanta; Emory University

Multiple version iconThere are 2 versions of this paper

Date Written: September 2016

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% increase of real 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.

Suggested Citation

Chen, Kaiji and Higgins, Patrick C. and Waggoner, Daniel F. and Zha, Tao A., Impacts of Monetary Stimulus on Credit Allocation and the Macroeconomy: Evidence from China (September 2016). NBER Working Paper No. w22650, Available at SSRN: https://ssrn.com/abstract=2840598

Kaiji Chen (Contact Author)

Emory University - Department of Economics ( email )

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HOME PAGE: http://https://sites.google.com/site/chenkaiji/research

Federal Reserve Bank of Atlanta ( email )

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Patrick C. Higgins

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

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Daniel F. Waggoner

Federal Reserve Bank of Atlanta ( email )

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404-521-8278 (Phone)

Tao A. Zha

Federal Reserve Bank of Atlanta ( email )

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United States
404-521-8353 (Phone)
404-521-8956 (Fax)

Emory University ( email )

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