Shadow banking activity and entrusted loans in a DSGE model of China

Wang, Chaowei and Mai Le, Vo Phuong and Matthews, Kent and Zhou, Peng (2020) Shadow banking activity and entrusted loans in a DSGE model of China. The Manchester School . ISSN 1463-6786

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Abstract

This paper examines how the risky lending activities of the state‐owned enterprises (SOEs) affect the effectiveness of monetary and fiscal policy in China with a shadow banking sector. We develop a dynamic stochastic general equilibrium (DSGE) macroeconomic model with two production sectors, where the SOEs have access to low cost funds from the commercial banks (also mainly state‐owned) and on‐lend to the private sector in the form of entrusted loans. The Bayesian estimation results show that higher restrictions on bank credit push SOEs to engage in more shadow banking in this form which dampens the effectiveness of contractionary monetary policy. Expansionary fiscal policy increases output, but crowds out private investment, which can further drain the financial market and exert a detrimental effect on the Chinese economy.

Item Type: Article
Keywords: Bayesian estimation; DSGE; entrusted loans; monetary policy; shadow banking; state-owned enterprises
Schools/Departments: University of Nottingham Ningbo China > Faculty of Business > Nottingham University Business School China
Identification Number: https://doi.org/10.1111/manc.12319
Depositing User: Zhou, Elsie
Date Deposited: 10 Jun 2020 00:58
Last Modified: 10 Jun 2020 00:58
URI: http://eprints.nottingham.ac.uk/id/eprint/60864

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