What We Do In The Shadows: Chinese Shadow Credit Growth and Monetary Policy

Abstract

This paper evaluates the effect of Chinese monetary policy shocks on credit creation through the shadow banking sector in mainland China. I identify monetary policy shocks by constructing a measure of monetary policy surprises based on changes to the 1-Year Interest Rate Swaps on the 7-Day Repo Rate on monetary policy announcement dates. A two-stage local projection was then estimated, using the surprise measure as an instrument. The results give two key findings:

1) shadow credit expands in response to contractionary monetary policy, and

2) I provide additional evidence of the transmission of monetary policy through the interest rate channel.

Keywords: Monetary policy, Local Projections, Shadow Banking, Chinese Economy

JEL Classification: E5, F3, G0