The Nexus of Monetary Policy and Shadow Banking in China (with Chen and Ren)
THE NEXUS OF MONETARY POLICY AND SHADOW BANKING IN CHINA
(Forthcoming at American Economic Review. For a working paper version, see also NBER Working Paper 23377, May 2017, http://www.nber.org/papers/w23377)
BY KAIJI CHEN, JUE REN, AND TAO ZHA
Abstract We estimate the quantity-based monetary policy system in China. We argue that China’s rising shadow banking was inextricably linked to banks’ \emph{balance-sheet} risk and hampered the effectiveness of monetary policy on the banking system during the 2009-2015 period of monetary policy contractions. By constructing two micro datasets at the individual bank level, we substantiate this argument with three empirical findings: (1) in response to monetary policy tightening, nonstate banks actively engaged in intermediating shadow banking products; (2) these banks, in sharp contrast to state banks, brought shadow banking products onto the balance sheet via risky investments; (3) bank loans and risky investment assets in the banking system respond in opposite directions to monetary policy tightening, which makes monetary policy less effective. We build a theoretical framework to derive the above testable hypotheses and explore implications of the interaction between monetary and regulatory policies.
Forecasting China’s Economic Growth and Inflation (with Higgins and Zhong)
FORECASTING CHINA’S ECONOMIC GROWTH AND INFLATION
(China Economic Review, 2016, volume 41, pages 46-61)
BY PATRICK HIGGINS, TAO ZHA, AND KAREN ZHONG
Abstract Although macroeconomic forecasting forms an integral part of the policymaking process, there has been a serious lack of rigorous and systematic research in the evaluation of out-of-sample model-based forecasts of China’s real GDP growth and CPI inflation. This paper fills this research gap by providing a replicable forecasting model that beats a host of other competing models when measured by root mean square errors, especially over long-run forecast horizons. The model is shown to be capable of predicting turning points and to be usable for policy analysis under different scenarios. It predicts that China’s future GDP growth will be of L-shape rather than U-shape.
China’s Growth Prospects: Discussion of Loren Brandt’s Paper
CHINA’S GROWTH PROSPECTS: DISCUSSION OF LOREN BRANDT’S PAPER
(for the November 19-20, 2015 “Policy Challenges in a Diverging Global Economy” conference hosted by the Federal Reserve Bank of San Francisco)
BY TAO ZHA
China’s Macroeconomic Time Series: Methods and Implications (with Higgins)
CHINA’S MACROECONOMIC TIME SERIES: METHODS AND IMPLICATIONS
(Very Preliminary)
BY PATRICK HIGGINS AND TAO ZHA
Abstract We show how to construct a core set of macroeconomic time series usable for studying China’s macroeconomy systematically. When applicable, we document our construction methods in comparison to other existing approaches.
Trends and Cycles in China’s Macroeconomy (with Chang, Chen, and Waggoner)
TRENDS AND CYCLES IN CHINA’S MACROECONOMY
(NBER Macroeconomics Annual, 2016, volume 30, pages 1-84)
BY CHUN CHANG, KAIJI CHEN, DANIEL F. WAGGONER, AND TAO ZHA
Abstract We make four contributions in this paper. First, we provide a core of macroeconomic time series usable for systematic research on China. Second, we document, through various empirical methods, the robust findings about striking patterns of trend and cycle. Third, we build a theoretical model that accounts for these facts. Fourth, the model’s mechanism and assumptions are corroborated by institutional details, disaggregated data, and banking time series, all of which are distinctive of Chinese characteristics. We argue that preferential credit policy for promoting heavy industries accounts for the unusual cyclical patterns as well as the post-1990s economic transition featured by the persistently rising investment rate, the declining labor income share, and a growing foreign surplus. The departure of our theoretical model from standard ones offers a constructive framework for studying China’s modern macroeconomy.
A non-technical description of this paper, published by VoxEU.org (CEPR’s policy portal), appears in a Vox column.
