Effects of credit misallocation on systemic risk of non-financial corporations: The role of monetary policy

Abstract

Motivated by the stylized facts of aggravated credit misallocation and systemic risk in China's real sector, this paper examines the effect of credit misallocation on the systemic risk of non-financial corporations (NFCs) and the role of monetary policy in moderating the effect, leveraging the annual financial data of Chinese non-financial listed corporations from 2007 to 2020. The results indicate that credit misallocation significantly elevates the systemic risk of NFCs in China, but a persistently moderate monetary policy mitigates this effect. The results are robust to changing the measurement of key variables and addressing endogeneity problems. Further analysis reveals that the moderation and continuity in the monetary policy stance alleviates the effect by curbing NFCs' over-indebtedness, trade credit interlinkages, and joint exposure to financial risks. Our findings advance the understanding of systemic risk drivers and offer policy insights for optimizing monetary frameworks to reduce systemic risk accumulation in real economies.