China’s market economy, shadow banking and the frequency of growth slowdown

Le, Vo Phuong Mai and Matthews, Kent and Meenagh, David and Minford, Patrick and Xiao, Zhiguo (2020) China’s market economy, shadow banking and the frequency of growth slowdown. The Manchester School . ISSN 1463-6786

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Abstract

The activity of the Shadow Banks in China has been the subject of considerable interest in recent years. Total shadow banking lending has reached over 60% of GDP and has grown faster than regular bank lending. It has been argued that unregulated shadow banking has fuelled a credit boom that poses a risk to the stability of the financial system. This paper estimates a model of the Chinese economy using a DSGE framework that accommodates a banking sector that isolates the effects of lending to the private sector including shadow bank lending. A refinement of the model allows for bank lending including lending by the shadow banks to affect the credit premium on private investment. The main finding is that while financial shocks are significant, it is real shocks that dominate. The model is used to simulate the frequency of growth slowdowns in China and concludes that these are more likely to be driven by real sector shocks rather than financial sector, including shadow bank shocks. This paper differs from other applications in its use of indirect inference to test the fitted model against a threeequation VAR of inflation, output gap and interest rate.

Item Type: Article
Keywords: DSGE model; China; crises; indirect inference; shadow banking
Schools/Departments: University of Nottingham Ningbo China > Faculty of Business > Nottingham University Business School China
Identification Number: https://doi.org/10.1111/manc.12318
Depositing User: Zhou, Elsie
Date Deposited: 10 Jun 2020 08:55
Last Modified: 10 Jun 2020 08:55
URI: http://eprints.nottingham.ac.uk/id/eprint/60863

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