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Banking and the Macroeconomy in China: A Banking Crisis Deferred?

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The downturn in the world economy following the global banking crisis has left the Chinese economy relatively unscathed. This paper develops a model of the Chinese economy using a DSGE framework with a banking sector to shed light on this episode. It differs from other applications in the use of indirect inference procedure to test the ?tted model. The model finds that the main shocks hitting China in the crisis were international and that domestic banking shocks were unimportant. However, directed bank lending and direct government spending was used to supplement monetary policy to aggressively offset shocks to demand. The model finds that government expenditure feedback reduces the frequency of a business cycle crisis but that any feedback effect on investment creates excess capacity and instability in output.

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  • Le, Vo Phuong Mai & Matthews, Kent & Meenagh, David & Minford, Patrick & Xiao, Zhigui, 2013. "Banking and the Macroeconomy in China: A Banking Crisis Deferred?," Cardiff Economics Working Papers E2013/5, Cardiff University, Cardiff Business School, Economics Section.
  • Handle: RePEc:cdf:wpaper:2013/5
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    Cited by:

    1. Minford, Lucy, 2015. "Tax, Regulation and Economic Growth: A Case Study of the UK," Cardiff Economics Working Papers E2015/16, Cardiff University, Cardiff Business School, Economics Section, revised Jun 2016.
    2. Li Dai & Patrick Minford & Peng Zhou, 2015. "A DSGE model of China," Applied Economics, Taylor & Francis Journals, vol. 47(59), pages 6438-6460, December.
    3. M.Emranul Haque & Paul Middleditch & Shuonan Zhang, 2018. "Financial development and innovation: A DSGE comparison of Chinese and US business cycles," Centre for Growth and Business Cycle Research Discussion Paper Series 244, Economics, The Univeristy of Manchester.
    4. Ng, Eric C.Y., 2015. "Housing market dynamics in China: Findings from an estimated DSGE model," Journal of Housing Economics, Elsevier, vol. 29(C), pages 26-40.
    5. Hongyi Chen & Michael Funke & Ivan Lozev & Andrew Tsang, 2020. "To Guide or Not to Guide? Quantitative Monetary Policy Tools and Macroeconomic Dynamics in China," International Journal of Central Banking, International Journal of Central Banking, vol. 16(5), pages 49-94, October.
    6. Le, Vo Phuong Mai & Matthews, Kent & Meenagh, David & Minford, Patrick & Xiao, Zhiguo, 2015. "China’s financial crisis – the role of banks and monetary policy," Cardiff Economics Working Papers E2015/1, Cardiff University, Cardiff Business School, Economics Section.
    7. Minford, Patrick & Ou, Zhirong & Zhu, Zheyi, 2019. "Can a small New Keynesian model of the world economy with risk-pooling match the facts?," Cardiff Economics Working Papers E2019/10, Cardiff University, Cardiff Business School, Economics Section.
    8. Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick & Wickens, Michael, 2015. "Small sample performance of indirect inference on DSGE models," Cardiff Economics Working Papers E2015/2, Cardiff University, Cardiff Business School, Economics Section.
    9. Vo Le & David Meenagh & Patrick Minford & Michael Wickens & Yongdeng Xu, 2016. "Testing Macro Models by Indirect Inference: A Survey for Users," Open Economies Review, Springer, vol. 27(1), pages 1-38, February.
    10. Peng, Yuchao & Yan, Lili, 2015. "Political Connections, Discriminatory Credit Constraint and Business Cycle," MPRA Paper 61439, University Library of Munich, Germany.
    11. Ma, Yong, 2016. "Nonlinear monetary policy and macroeconomic stabilization in emerging market economies: Evidence from China," Economic Systems, Elsevier, vol. 40(3), pages 461-480.
    12. Vo Le & David Meenagh & Patrick Minford & Michael Wickens & Yongdeng Xu, 2016. "Testing Macro Models by Indirect Inference: A Survey for Users," Open Economies Review, Springer, vol. 27(1), pages 1-38, February.

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    More about this item

    Keywords

    DSGE model; Financial Frictions; China; Crises; Indirect Inference;

    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
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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