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.
Assessing the Macroeconomic Impact of Bank Intermediation Shocks: A Structural Approach (with Chen)
ASSESSING THE MACROECONOMIC IMPACT OF BANK INTERMEDIATION SHOCKS: A STRUCTURAL APPROACH
BY KAIJI CHEN AND TAO ZHA
Abstract We take a structural approach to assessing the empirical importance of shocks to the supply of bank-intermediated credit in affecting macroeconomic fluctuations. First, we develop a theoretical model to show how credit supply shocks can be transmitted into disruptions in the production economy. Second, we utilize the unique micro banking data to identify and support the model’s key mechanism. Third, we find that the output effect of credit supply shocks is not only economically and statistically significant but also consistent with the VAR evidence. Our mode estimation indicates that a negative one-standard-deviation shock to credit supply generates a loss of output by one percent.
Liquidity Premia, Price-Rent Dynamics, and Business Cycles (with Miao and Wang)
LIQUIDITY PREMIA, PRICE-RENT DYNAMICS, AND BUSINESS CYCLES
(NBER Working Paper 20377, August 2014)
BY JIANJUN MIAO, PENGFEI WANG, AND TAO ZHA
Abstract In the U.S. economy over the past twenty five years, house prices exhibit fluctuations considerably larger than house rents and these large fluctuations tend to move together with business cycles. We build a simple theoretical model to characterize these observations by showing the tight connection between price-rent fluctuation and the liquidity constraint faced by productive firms. After developing economic intuition for this result, we estimate a medium-scale dynamic general equilibrium model to assess the empirical importance of the role the price-rent fluctuation plays in the business cycle. According to our estimation, a shock that drives most of the price-rent fluctuation explains 30% of output fluctuation over a six-year horizon.
Land Prices and Unemployment (with Liu and Miao)
(Journal of Monetary Economics, vol. 80, June 2016, pages 86-105)
BY ZHENG LIU, JIANJUN MIAO, AND TAO ZHA
Abstract We integrate the housing market and the labor market in a dynamic general equilibrium model with credit and search frictions. We argue that the labor channel, combined with the standard credit channel, provides a strong transmission mechanism that can deliver a potential solution to the Shimer (2005) puzzle. The model is confronted with U.S. macroeconomic time series. The estimation results account for two prominent facts observed in the data. First, land prices and unemployment move in opposite directions over the business cycle. Second, a shock that moves land prices also generates the observed large volatility of unemployment.
Land-Price Dynamics and Macroeconomic Fluctuations (formerly entitled “Do Credit Constraints Amplify Macroeconomic Fluctuations ?”) (with Liu and Wang)
LAND-PRICE DYNAMICS AND MACROECONOMIC FLUCTUATIONS (Econometrica, vol. 81, no. 3, May, 2013, pages 1147-1184) Formerly entitled “Do Credit Constraints Amplify Macroeconomic Fluctuations?”
BY ZHENG LIU, PENGFEI WANG, AND TAO ZHA
For the Dynare 4.2 code, click on DynareCode4LWZpaper.zip. For the C/C++code, click on C_Cpp_Library4LWZpaper.zip.
For supplemental appendices, click on SupplementalMaterial.zip.
Abstract We argue that positive co-movements between land prices and business investment are a driving force behind the broad impact of land-price dynamics on the macroeconomy. We develop an economic mechanism that captures the co-movements by incorporating two key features into a DSGE model: We introduce land as a collateral asset in firms’ credit constraints and we identify a shock that drives most of the observed fluctuations in land prices. Our estimates imply that these two features combine to generate an empirically important mechanism that amplifies and propagates macroeconomic fluctuations through the joint dynamics of land prices and business investment.
Credit Frictions in a Production Economy with Heterogeneous Agents (with Liu and Wang)
