Kaiji Chen, Jue Ren, Tao Zha
In: American Economic Review, Vol. 108, No. 12, December 2018
Based on China’s institutional arrangements, Chen et al. develop a theoretical framework to analyze how banks reallocate from bank loans to risky investments in response to monetary policy tightening. Moreover they render the empirical evidence that non-state banks, during the period 2009-2015, significantly increased their activity in promoting entrusted lending off balancing sheet. At the same time shadow banking products were brought onto the balance sheet. This behavior hampered the effectiveness of monetary policy on the total bank credit. In addition they make a contribution whether China should gradually move away from quantity-based monetary policy to interest rate monetary policy.