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

36 Pages Posted: 16 Apr 2013

See all articles by Vo Phuong Mai Le

Vo Phuong Mai Le

Cardiff University - Cardiff Business School

Kent Matthews

Cardiff University Business School

David Meenagh

Cardiff University Business School

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Zhiguo Xiao

Fudan University - School of Management

Date Written: April 2013

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 fitted 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: China, Crises, DSGE model, Financial Frictions, Indirect Inference

JEL Classification: C1, E3, E44, E52

Suggested Citation

Le, Vo Phuong Mai and Matthews, Kent and Meenagh, David and Minford, Patrick and Xiao, Zhiguo, Banking and the Macroeconomy in China: A Banking Crisis Deferred? (April 2013). CEPR Discussion Paper No. DP9422. Available at SSRN: https://ssrn.com/abstract=2251703

Vo Phuong Mai Le (Contact Author)

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Kent Matthews

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5855 (Phone)
+44 29 2087 4419 (Fax)

David Meenagh

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5198 (Phone)
+44 29 2087 4419 (Fax)

Patrick Minford

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Zhiguo Xiao

Fudan University - School of Management ( email )

670 Guoshun Road
Shanghai, 200433
China

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