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Shadow banking, investment and interest rate transmission: Evidence from macroprudential policy in China

Author

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  • Li, Weixue
  • Wang, Sipei
  • Cheung, Adrian (Wai Kong)
  • Xu, Changsheng

Abstract

In this study, we investigate the impact of shadow banking on the effectiveness of price-based monetary policy, which uses interest rates to stabilize prices as an intermediate target. Based on the data analysis of Chinese A-share listed companies from 2010 to 2021, we find that shadow banking significantly increases the sensitivity of investment to the benchmark interest rate and increases the effectiveness of the price-based monetary policy. By considering the implementation of the macroprudential assessment (MPA) system as a quasi-natural experiment, we find that the sensitivity of investment to the benchmark interest rate decreases significantly in non-state-owned enterprises (non-SOEs). Additionally, the MPA system is more likely to influence the sensitivity of investment to the interest rate in non-SOEs if they are uncollateralized, non-high-tech, or competitive. In the transition stage of promoting the price-based monetary policy, the Chinese government should actively regulate the development of shadow banking to alleviate the financing difficulties faced by non-SOEs and improve the efficiency of the interest rate transmission mechanism.

Suggested Citation

  • Li, Weixue & Wang, Sipei & Cheung, Adrian (Wai Kong) & Xu, Changsheng, 2024. "Shadow banking, investment and interest rate transmission: Evidence from macroprudential policy in China," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 115-133.
    • Handle: RePEc:eee:ecanpo:v:81:y:2024:i:c:p:115-133
    DOI: 10.1016/j.eap.2023.11.013
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    More about this item

    Keywords

    Shadow banking; Interest rate transmission mechanism; Monetary policy; Macroprudential policy;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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