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China's Monetary Policy and the Loan Market: How Strong is the Credit Channel in China?

Author

Listed:
  • Max Breitenlechner

    (University of Innsbruck)

  • Riikka Nuutilainen

    (Bank of Finland)

Abstract

We study the credit channel of Chinese monetary policy in a structural vector autoregressive framework. Using combinations of zero and sign restrictions, we identify monetary policy shocks linked to supply and demand responses in the loan market. Our results show that policy shocks coinciding with loan supply effects account for roughly 10 percent of output dynamics after two years, while loan demand effects represent up to 7 percent of output dynamics depending on the policy measure. The credit channel thus constitutes an important and economically relevant transmission channel for monetary policy in China. Monetary policy in China also accounts for a relatively high share of business cycle dynamics.

Suggested Citation

  • Max Breitenlechner & Riikka Nuutilainen, 2019. "China's Monetary Policy and the Loan Market: How Strong is the Credit Channel in China?," GRU Working Paper Series GRU_2019_027, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    • Handle: RePEc:cth:wpaper:gru_2019_027
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    File URL: https://www.cb.cityu.edu.hk/ef/doc/GRU/WPS/GRU%232019-027%20Breitenlechner.pdf
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    More about this item

    Keywords

    China; Monetary Policy; Transmission Effects; Structural Vector Autoregression; Zero and Sign Restrictions;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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

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