Monetary Stimulus amid the Infrastructure Investment Spree: Evidence from China's Loan-Level Data

Kaiji Chen, Haoyu Gao, Patrick Higgins, Daniel F. Waggoner, and Tao Zha
Working Paper 2020-16
August 2020

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Abstract: We study the impacts of the 2009 monetary stimulus and its interaction with infrastructure spending on credit allocation. We develop a two-stage estimation approach and apply it to China's loan-level data that covers all sectors in the economy. We find that except for the manufacturing sector, monetary stimulus itself did not favor state-owned enterprises (SOEs) over non-SOEs in credit access. Infrastructure investment driven by nonmonetary factors, however, enhanced the monetary transmission to bank credit allocated to local government financing vehicles in infrastructure and at the same time weakened the impacts of monetary stimulus on bank credit to non-SOEs in sectors other than infrastructure.

JEL classification: E5, E02, C3, C13

Key words: infrastructure investment, monetary policy transmission, fiscal shocks, policy interaction, credit reallocation, LGFVs link

The authors thank Markus Brunnermeier, Lawrence Christiano, Will Cong, Marty Eichenbaum, Zhiguo He, Eric Leeper, Zheng Liu, Sergio Rebelo, Mark Spiegel, Robert Townsend, Shang-Jin Wei, Wei Xiong, and Xiaoyun Yu as well as seminar participants at the 2019 AFR Summer Institute in Economics and Finance; the third International Monetary Fund-Atlanta Fed China Workshop; the China International Conference in Macroeconomics; the International Monetary Fund; the Hong Kong Monetary Authority; the second HKUST-Jian Joint-Conference in Macroeconomics; the European Central Bank-Tsinghua Conference on China; the 2019 International Conference on Exchange Rates, Monetary Policy, and Frictions; the Chinese University of Hong Kong; the University of Virginia; and Princeton University for helpful discussions and comments. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Kaiji Chen, Emory University, 1602 Fishburne Drive , Atlanta, GA 30322-2240, and the Federal Reserve Bank of Atlanta; Haoyu Gao, Renmin University of China, Beijing, China; Patrick Higgins, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470; Daniel F. Waggoner, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470; or Tao Zha, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, and Emory University and NBER.

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