Monetary policy uncertainty, debt financing cost and real economic activities: Evidence from China

This paper studies how monetary policy uncertainty (MPU) propagates to real economic activities in China, and suggests that debt financing cost plays a pivotal role. Our empirical analysis, based on firm-level panel data, indicates that the rise in MPU leads to a significant increase in debt financi...

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Bibliographic Details
Published in:International review of economics & finance 2022-07, Vol.80, p.1025-1044
Main Authors: Xiang, Jingjie, Li, Li
Format: Article
Language:English
Subjects:
Debt financing cost
DSGE models
Economic activities
Monetary policy uncertainty
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Summary:This paper studies how monetary policy uncertainty (MPU) propagates to real economic activities in China, and suggests that debt financing cost plays a pivotal role. Our empirical analysis, based on firm-level panel data, indicates that the rise in MPU leads to a significant increase in debt financing cost, which further reduces firm investment. The interacted VAR model based on macro-level data also suggests that the deflationary effect of MPU is intensified when debt level is high. Moreover, we present a theoretical framework of DSGE analysis to formalize how the rise in MPU depresses economic activities. Simulations featuring default risks and uncertainty shocks support evidence that MPU is transmitted to the real sector through debt financing cost channel.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2022.03.006