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Monetary policy uncertainty, debt financing cost and real economic activities: Evidence from China

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  • Xiang, Jingjie
  • Li, Li

Abstract

This paper studies how monetary policy uncertainty (MPU) propagates to real economic activities in China, and suggests that debt financing cost plays a pivotal role. Our empirical analysis, based on firm-level panel data, indicates that the rise in MPU leads to a significant increase in debt financing cost, which further reduces firm investment. The interacted VAR model based on macro-level data also suggests that the deflationary effect of MPU is intensified when debt level is high. Moreover, we present a theoretical framework of DSGE analysis to formalize how the rise in MPU depresses economic activities. Simulations featuring default risks and uncertainty shocks support evidence that MPU is transmitted to the real sector through debt financing cost channel.

Suggested Citation

  • Xiang, Jingjie & Li, Li, 2022. "Monetary policy uncertainty, debt financing cost and real economic activities: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 1025-1044.
    • Handle: RePEc:eee:reveco:v:80:y:2022:i:c:p:1025-1044
    DOI: 10.1016/j.iref.2022.03.006
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