Monetary Stimulus amidst the Infrastructure Investment Spree: Evidence from China's Loan‐Level Data

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. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Does Fiscal Spending Affect TFP? Evidence from Chinese Provinces

“…Several studies document the negative impact of China's post-2008 economic stimulus plan on the allocation efficiency in the credit market (Cong et al, 2019;Huang, et al, 2020;Chen et al 2023). For example, Huang (2020) show local public debt crowd out private investment during 2006-2013.…”