The Nexus of Monetary Policy and Shadow Banking in China / Kaiji Chen, Jue Ren, Tao Zha.

Format:

Book

Author/Creator:

Chen, Kaiji.

Contributor:

National Bureau of Economic Research.

Ren, Jue.

Zha, Tao.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23377.

NBER working paper series no. w23377

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

We estimate the quantity-based monetary policy system in China. We argue that China's rising shadow banking was inextricably linked to banks' balance-sheet risk and hampered the effectiveness of monetary policy on the banking system during the 2009-2015 period of monetary policy contractions. By constructing two micro datasets at the individual bank level, we substantiate this argument with three empirical findings: (1) in response to monetary policy tightening, nonstate banks actively engaged in intermediating shadow banking products; (2) these banks, in sharp contrast to state banks, brought shadow banking products onto the balance sheet via risky investments; (3) bank loans and risky investment assets in the banking system respond in opposite directions to monetary policy tightening, which makes monetary policy less effective. We build a theoretical framework to derive the above testable hypotheses and explore implications of the interaction between monetary and regulatory policies.

Notes:

Print version record

May 2017.