Shadow banks, banking policies and China's macroeconomic fluctuations. (September 2021)

• Record Type: Journal Article
• Authors: Le, Vo Phuong Mai; Matthews, Kent; Meenagh, David; Minford, Patrick; Xiao, Zhiguo
• Is Part Of: Journal of international money and finance. Volume 116(2021)
• Publication Date: 2021-09
• Subjects: DSGE model -- China Shadow banking -- Severe economic slowdowns -- Indirect inference -- Monetary policy; E3 -- E44 -- E52; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2021.102415
• Languages: English
• ISSNs: 0261-5606

Abstract

Highlights: A DSGE model of the Chinese economy with money and shadow banking is developed and estimated with Indirect Inference. The policy of deleveraging and restricting shadow banking reduces private investment and lowers aggregate output. In terms of stabilization, a policy of nominal GDP targeting is superior to a Taylor Rule, a Friedman rule, or a price level targeting rule. Abstract: This paper develops a model of the Chinese economy using a DSGE framework that accommodates a banking sector and money. The model is used to shed light on the period of the Global Financial Crisis. It differs from other applications in the use of Indirect Inference to estimate and test the model. Officially mandated bank lending and government spending were used to supplement monetary policy to aggressively offset shocks to demand. This paper examines the efficacy of monetary policy in terms of the reduction in the frequency of severe economic slowdowns. We find that monetary policy can be used more vigorously to stabilise the economy, making direct banking controls and fiscal activism unnecessary. A nominal GDP targeting monetary policy is the most efficient, compared with a conventional Taylor Rule, a Friedman rule or a price level targeting rule.