Social Sciences in China (Chinese Edition)

No. 11, 2023

The Effectiveness of Chinese Structural Monetary Policy: A Theoretical and Empirical Study Based on the Marginal Effect of Financial Accelerator

(Abstract)

Zhan Minghua, Li Shuai and Wu Zhouheng

Traditional theories that focus on explaining the phenomenon in developed countries do not support the effectiveness of monetary policy in structural macroeconomic management. They believe that structural problems can be adjusted by price signals without extra policy intervention. However, China’s market system is still under development, and small and large firms differ in their risk diversification abilities. Based on a new perspective from asymmetric marginal effect of financial accelerators, we build a theoretical model that features heterogeneous firm characteristics, and use macroeconomic data and listed firm micro-level data for empirical verification. The results show that the different marginal effect of financial accelerators on small and large firms can further distort the economic structure and worsen bank balance sheets. Structural monetary policy can correct this structural distortion through risk compensation thus improving bank balance sheets quality. It adjusts structure distortion while achieving the dual goals of promoting economic growth and reducing systemic risks.