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

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  • Max Breitenlechner

    (University of Innsbruck)

  • Riikka Nuutilainen

    (Bank of Finland Institute for Economies in Transition (BOFIT))

Abstract

We study the macroeconomic relevance of credit supply effects in the transmission of Chinese monetary policy. Using combinations of zero and sign restrictions in a structural vector autoregressive framework, we simultaneously identify monetary policy shocks and supply dynamics in the loan market. Our results show that policy shocks which coincide with loan supply effects account for roughly 60% of the overall effects of policy induced output dynamics. Moreover, we find that it takes roughly one year that banks adjust their lending strategies and loan supply effects unfold completely. Overall, our results provide robust empirical evidence that the credit channel constitutes an important and economically relevant transmission channel for monetary policy in China.

Suggested Citation

  • Max Breitenlechner & Riikka Nuutilainen, 2023. "China’s Monetary Policy and the Loan Market: How Strong is the Credit Channel in China?," Open Economies Review, Springer, vol. 34(3), pages 555-577, July.
    • Handle: RePEc:kap:openec:v:34:y:2023:i:3:d:10.1007_s11079-022-09705-2
    DOI: 10.1007/s11079-022-09705-2
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