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

Wang, Chaowei, Le, Vo Phuong Mai, Matthews, Kent and Zhou, Peng 2021. Shadow banking activity and entrusted loans in a DSGE model of China. Manchester School 89 (5) , pp. 445-469. 10.1111/manc.12319

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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
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Publisher: Wiley
ISSN: 1463-6786
Date of First Compliant Deposit: 27 June 2020
Date of Acceptance: 29 April 2020
Last Modified: 10 Sep 2021 14:45
URI: http://orca.cardiff.ac.uk/id/eprint/132831

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