Monetary Stimulus amid the Infrastructure Investment Spree: Evidence from China's Loan-Level Data

Kaiji Chen, Haoyu Gao, Patrick Higgins, Daniel F. Waggoner, and Tao Zha
Working Paper 2020-16a
August 2020 (Revised July 2022)

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Abstract: We study how a fiscal expansion via infrastructure investment influences the dynamic impacts of monetary stimulus on credit allocation. We develop a two-stage approach and apply it to the Chinese economy with a confidential loan-level dataset that covers all sectors. We find that infrastructure investment significantly weakened monetary policy’s transmission to credit allocated to private firms, while reinforcing the monetary effects on loans to state-owned firms. This fiscal-monetary interaction channel is key to understanding the preferential credit access enjoyed by state-owned firms during the stimulus period. Consequently, monetary stimulus crowded out private investment and lowered efficiency in capital allocation.

JEL classification: E5, E02, C3, C13

Key words: infrastructure investment, monetary policy transmission, fiscal shocks, policy interaction, credit reallocation, LGFVs

The authors thank Markus Brunnermeier, Lawrence Christiano, Will Cong, Marty Eichenbaum, Zhiguo He, Yi Huang, Eric Leeper, Zheng Liu, Loretta Mester, Sergio Rebelo, Mark Spiegel, Robert Townsend, Shang-Jin Wei, Wei Xiong, and Xiaoyun Yu as well as seminar participants at the Federal Reserve Bank of Cleveland, 2019 International Conference on “Exchange Rates, Monetary Policy, and Frictions” sponsored by Northwestern University, the 2019 AFR Summer Institute in Economics and Finance; the third International Monetary Fund-Atlanta Fed China Workshop; the China International Conference in Macroeconomics; the International Monetary Fund; the Hong Kong Monetary Authority; the second HKUST-Jinan University-Conference in Macroeconomics; the European Central Bank-Tsinghua Conference on China; the Chinese University of Hong Kong; the University of Virginia; and Princeton University for helpful discussions and comments. Haoyu Gao acknowledges the research support from the National Natural Science Foundation of China (NSFC 71702207 and 71850008). An earlier version of this paper is titled “Impacts of Monetary Stimulus on Credit Allocation and Macroeconomy: Evidence from China.” The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Kaiji Chen, Emory University, 1602 Fishburne Drive , Atlanta, GA 30322-2240, and the Federal Reserve Bank of Atlanta; Haoyu Gao, Renmin University of China, Beijing, China; Patrick Higgins, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470; Daniel F. Waggoner, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470; or Tao Zha, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, and Emory University and NBER.

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