Expansionary Monetary Policy and Credit Misallocation: Evidence from China

Abstract

We identified the impact of the expansionary monetary policy in China during the 2008–2009 global financial crisis on the credit and investment allocation among firms after controlling for the simultaneous fiscal stimulus. We utilized the extent of the exposure to the construction sector, which is the primary beneficiary of the fiscal stimulus to control for the latter factor, as well as the variable indicating state ownership. We obtained robust evidence that the expansionary monetary policy led to the misallocation of bank credits to less productive firms after controlling for these confounding factors. However, we found that the investment increased more for more productive firms. Additional analyses showed that this is partly because more productive firms hoarded cash before the crisis, and partly because less productive firms more often engaged in building cash reserves.