Monetary Stimulus Amidst the Infrastructure Investment Spree: Evidence from China's Loan-Level Data

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.

• August 26, 2020