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Shadow banks, banking policies and China’s macroeconomic fluctuations

Author

Listed:
  • Le, Vo Phuong Mai
  • Matthews, Kent
  • Meenagh, David
  • Minford, Patrick
  • Xiao, Zhiguo

Abstract

This paper develops a model of the Chinese economy using a DSGE framework that accommodates a banking sector and money. The model is used to shed light on the period of the Global Financial Crisis. It differs from other applications in the use of Indirect Inference to estimate and test the model. Officially mandated bank lending and government spending were used to supplement monetary policy to aggressively offset shocks to demand. This paper examines the efficacy of monetary policy in terms of the reduction in the frequency of severe economic slowdowns. We find that monetary policy can be used more vigorously to stabilise the economy, making direct banking controls and fiscal activism unnecessary. A nominal GDP targeting monetary policy is the most efficient, compared with a conventional Taylor Rule, a Friedman rule or a price level targeting rule.

Suggested Citation

  • Le, Vo Phuong Mai & Matthews, Kent & Meenagh, David & Minford, Patrick & Xiao, Zhiguo, 2021. "Shadow banks, banking policies and China’s macroeconomic fluctuations," Journal of International Money and Finance, Elsevier, vol. 116(C).
    • Handle: RePEc:eee:jimfin:v:116:y:2021:i:c:s0261560621000668
    DOI: 10.1016/j.jimonfin.2021.102415
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    References listed on IDEAS

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    Cited by:

    1. Zhang, Qiuyue & Que, Jiangjing & Qin, Xiuting, 2023. "Regional financial technology and shadow banking activities of non-financial firms: Evidence from China," Journal of Asian Economics, Elsevier, vol. 86(C).

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    More about this item

    Keywords

    DSGE model; China Shadow banking; Severe economic slowdowns; Indirect inference; Monetary policy;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • 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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