Working Paper: NBER ID: w22650
Authors: Kaiji Chen; Patrick Higgins; Daniel F. Waggoner; Tao Zha
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.\n
Keywords: Monetary Policy; China; Credit Allocation; Macroeconomy
JEL Codes: C3; C13; D3; E02
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary stimulus (E52) | Real GDP growth rate (O49) |
| Monetary stimulus (E52) | Bank credit allocated to investment in real estate and heavy industries (G21) |
| Bank credit allocated to investment in real estate and heavy industries (G21) | Persistently high investment rates (E22) |
| Bank credit allocated to investment in real estate and heavy industries (G21) | Rising debt-to-GDP ratio (H68) |
| Monetary policy (E52) | GDP fluctuations during shortfall state (E20) |
| Monetary policy (E52) | GDP fluctuations during normal times (E32) |
| Monetary stimulus (E52) | Intertemporal trade-off between short-run GDP growth and long-run accumulated debt (E62) |
| Monetary stimulus (E52) | Investment-to-GDP ratio (E20) |
| Monetary stimulus (E52) | Debt-to-GDP ratio (H68) |