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Professor of Economics at Emory University
Fellow, Asian Bureau of Financial and Economic Research (ABFER)
Associate Editor: International Economic Review; China Economic Review
Email: kaiji.chen@emory.edu
A. Publications and forthcoming papers
A. Publications and forthcoming papers
"China's Macroeconomic Development: The Role of Gradualist Reforms," with Tao Zha, forthcoming at Journal of Economic Literature
Download here for the NBER working paper version.
Abstract: This paper provides analytic guides to recent literature on China's macroeconomic development, emphasizing the critical role of the gradualist reform approach. Our analysis suggests that from 1978 to 1997, the gradualist approach contributed to China's aggregate total factor productivity and economic growth primarily through policies that facilitated the reallocation of surplus labor from agriculture to non-agricultural sectors. Since 1998, the government's focus shifted, with various reforms encouraging large enterprises, whether state-owned or privately-owned, to enter capital-intensive sectors, making capital deepening the main driver of economic growth. While this strategy sustained China's GDP growth, it also increased trade tensions with global partners, created barriers to transitioning to a consumption-led economy, and threatened China's long-term financial stability, casting long shadows over the Chinese economy.
“Constructing Quarterly Chinese Time Series Usable for Macroeconomic Analysis,” with Patrick Higgins and Tao Zha, May 2024, Journal of International Money and Finance.
Download here for the NBER working paper version.
Abstract: During episodes such as the global financial crisis and the Covid-19 pandemic, China experienced notable fluctuations in its GDP growth and key expenditure components. To explore the primary sources of these fluctuations, we construct a comprehensive dataset of GDP and its components in both nominal and real terms at a quarterly frequency. Applying two SVAR models to this dataset, we uncover the principal drivers of China's economic fluctuations across different episodes. In particular, our findings reveal the stark and enduring impacts of consumption-constrained shocks on GDP and all of its components, especially household consumption, both during and in the aftermath of the COVID-19 pandemic.
Download here for the dataset used in this paper.
Click here for the visualization of China's macroeconomic data and updated China's quarterly data.
“Monetary Stimulus amidst the Infrastructure Investment Spree: Evidence from China's Loan-level Data,” with Haoyu Gao, Patrick Higgins, Daniel Waggoner, and Tao Zha, 2023, Journal of Finance, 78(2), 1147-1204 .
Download here for the NBER working paper version.
"Cyclical Lending Standards: A Structural Analysis," with Patrick Higgins and Tao Zha, 2021, Review of Economic Dynamics, 42, 283-306.
Download here for the NBER working paper version.
"China's Housing Policy and Housing Boom and Their Macroeconomic Impacts," Oxford Research Encyclopedia of Economics and Finance, 2020, December.
"Macroeconomic Effects of China's Financial Policies", with Tao Zha, Chapter for the Handbook of China's Financial Markets, ed. by Marlene Amstad, Guofeng Sun and Wei Xiong.
This research is supported by NSF Grant SES-1558486.
Download here for the NBER working paper version.
"The Nexus of Monetary Policy and Shadow Banking in China", with Jue Ren and Tao Zha, American Economic Review, 2018, 108 (12), 3891-3936.
A previous version, entitled by "What Do We Learn from China's Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending", is replaced by this new version.
This research is supported by NSF Grant SES-1558486.
Download here for the NBER working paper version.
"The Great Housing Boom of China", with Yi Wen, American Economic Journal: Macroeconomics, 2017, 9 (2), 73-114.
Winner of 3rd Sun Yefang Financial Innovation Award.
This research is supported by NSF Grant SES-1558486.
See VoxChina for a non-technical summary.
Media coverage Wall Street Journal, Financial Times (China), Bloomberg.
"Trends and Cycles in China's Macroeconomy", with Chun Chang, Daniel Waggoner and Tao Zha, NBER Macroeconomic Annual, Vol. 30 (lead article), 1-84
Non-technical summary VoxEU and NBER Digest.
“Debt in the U.S. Economy,” with Ayse Imrohoroglu.
Economic Theory, 2017, 64(4), 675-706 .
“Investment-Specific Technological Changes: The Source of Long-run TFP Fluctuations”, with Edouard Wemy, European Economic Review, 2015, Vol. 80, 230-252.
"The Role of Allocative Efficiency in A Decade of Recovery," with Alfonso Irarrazabal, Review of Economic Dynamics, 2015, Vol. 18, 523-550, .
“Markovian Social Security in Unequal Societies", with Zheng Song, Scandinavian Journal of Economics, 2014, Vol. 116(4), 982-1011,
"Financial Frictions on Capital Allocation: A Transmission Mechanism of TFP Fluctuations", with Zheng Song, Journal of Monetary Economics, 2013, Vol. 60, 683-703
Matlab code and the data.
“A Life-Cycle Analysis of Social Security with Housing,” Review of Economic Dynamics, 2010, Vol 13(3), 597-615.
“A Quantitative Assessment of the Decline in the U.S. Current Account,” with Ayse Imrohoroglu and Selo Imrohoroglu, Journal of Monetary Economics, Vol. 56(8), 2009, 1135-1147.
“The Japanese Saving Rate between 1960-2004: Productivity or Demographics,” with Ayse Imrohoroglu and Selo Imrohoroglu, Economic Theory, Vol. 32, 87-104, 2007,
“The Japanese Saving Rate,” with Ayse Imrohoroglu and Selo Imrohoroglu, American Economic Review, Vol. 96(5), 1850-1858, 2006,
B. Working Papers
“Aggregate and Distributional Impacts of LTV Policy: Evidence from China's Micro Data,” with Qing Wang, Tong Xu and Tao Zha, R&R at Quantitative Economics.
Download here for the NBER working paper version.
Abstract: We study how loan-to-value (LTV) policy specifically targeting house purchases for speculative investments influences housing and mortgage markets. Using China’s administrative data of more than 3 million mortgage originations, we find that such a policy change during 2014Q4-2016Q3 fueled a housing boom by encouraging mortgage demand for primary homes, especially from middle-aged highly educated households. We develop a theoretical model to show that this LTV policy has a quantitatively large impact on house prices and mortgage originations to primary homes as homeowners trade up existing primary homes to larger ones via housing speculation.
"Preferential Credit Policy with Sectoral Markup Heterogeneity," with Yuxuan Huang, Xuewen Liu, Zhikun Lu, and Yong Wang, R&R at Journal of International Economics
Abstract: Many emerging economies adopt preferential credit policy towards selected sectors.
This paper provides an analysis of the economic rationale behind the preferential credit policies in the presence of market imperfections. Using firm-level data, we first empirically establish that sectors with higher markups are also those enjoying preferential credit subsidy. Disciplined by these empirical findings, we develop a dynamic model featuring sectoral markup heterogeneity and endogenous firm entry and exit. We show that sector-specific preferential credit policies can be used to improve aggregate
productive efficiency by reducing sectoral markup dispersion, despite the inefficiency introduced by allowing for less productive firms to enter and survive without exiting. We quantify the effect of preferential credit policy on aggregate TFP through the two opposite channels.
"Housing Privatization as Intergenerational Transfer," with Hanming Fang and Yang Tang (updated version coming soon)
Abstract: This paper argues that in economies with temporary fast-growing wage incomes, housing purchase subsidy to initial cohorts serves as an effective tool of redistribution from the future towards current generations. Using China’s housing reforms in the 1990s as a policy experiment, we show quantitatively that housing purchase subsidies to cohorts entering the labor market before 1994 increased substantially their homeowner rates in the initial years, which later on allowed them to enjoy the capital gain from selling their houses to future generations. Our welfare analysis suggests that, despite welfare loss for cohorts born in the 1980s, housing purchase subsidy is more desirable for future generations than alternative social security reforms as an intergenerational transfer scheme, as the latter involves high social security tax burdens for those generations experiencing a slowdown in wage growth.
“China's Monetary Transmission and Systemic Risk: A Role of Interbank Bond Markets,” with Yiqing Xiao and Tao Zha.
Abstract: We study how interbank wholesale funding in China influences monetary policy transmission under a dual-track interest-rate system and how it contributes to increasing systemic risks in recent years. By constructing a bank-panel dataset, we find that wholesale funding via interbank certificates of deposit not only facilitates policy interest rates to transmit into loan by non-state banks, but also leads to fast growth in their shadow banking activities as an unintended consequence. Accordingly, non-state banks with a heavier exposure to wholesale funding witness a larger increase in systemic risks in response to negative shocks to the economy since 2018. We advance a theoretical explanation of our empirical findings and quantify the trade-off of banking regulation on wholesale funding between the effectiveness of monetary policy transmission and exposure to systemic risks within this framework.
“The Impact of Monetary Policy on Bank Funding Composition: The Role of Deposit Market Regulation,” with Yiqing Xiao and Tao Zha.
Download here for the NBER working paper version.
Abstract: In well-developed financial markets, wholesale funding comoves negatively with retail deposits in response to interest rate changes, thereby weakening monetary policy transmission. By contrast, our study finds that in economies such as China where deposit rate ceilings are regulated, (i) retail deposits and wholesale funding comove positively as the policy rate changes, and (ii) wholesale funding strengthens the transmission of the policy rate to bank lending. We develop a theoretical model underscoring the role of deposit market regulation for the impact of monetary policy on bank funding composition in the context of the world's largest emerging market economy.
"Chinese Housing Market Sentiment Index: A Generative AI Approach and An Application to Monetary Policy Transmission," with Junru Guo, Jia He and Yunhui Zhao
Abstract: We construct a daily Chinese Housing Market Sentiment Index by applying GPT-4o to Chinese news articles. Our method outperforms traditional models and some other generative AI models in several validation tests, including a test based on a suite of machine learning models. Applying this index to household-level data, we find that after monetary easing, homebuyers in cities with more optimistic housing sentiment have lower responses in non-housing consumption due to the larger increase in house prices in these cities. Methodologically, our paper offers a tool for timely monitoring housing sentiment and lays out some principles for applying generative AI models, adaptable to other studies globally.
"Impacts of Monetary Stimulus on Credit Allocation and Macroeconomy: Evidence From China," with Patrick Higgins, Daniel Waggonor and Tao Zha
Abstract: We develop a new empirical framework to identify and estimate the effects of monetary stimulus on the real economy. The framework is applied to the Chinese economy when monetary policy in normal times was switched to an extraordinarily expansionary regime to combat the impact of the 2008 financial crisis. We show that this unprecedented monetary stimulus accounted for as high as a 4% increase of real GDP growth rate by the end of 2009. Monetary transmission to the real economy was through bank credit allocated disproportionately to financing investment in real estate and heavy industries. Such an asymmetric credit allocation resulted in the persistently high investment rate and debt-to-GDP ratio. Our findings provide a broad perspective on a tradeoff between short-run GDP growth and longer-run accumulated debt in response to large monetary interventions.
"News-Driven Borrowing Capacity and Corporate Savings", with Zheng Song and Yikai Wang
Abstract: We develop a theory of corporate liquidity demand, capturing the fact that a firm's borrowing capacity depends on news on future investment profitability. In our model, good news on future investment profitability expands a firm's borrowing capacity and therefore reduces the need for internal finance. Consequently, the firm's cash savings respond negatively to news on future profitability. This negative correlation is strongly supported by our empirical evidence using a combined data set of Compustat and IBES. Moreover, both our simulation and empirical results show that the sensitivity of cash savings to news on future profitability is a reliable indicator of the presence of financial constraints at firm level.
C. Work in Progress
C. Work in Progress
"The Spillover Effects of Real Estate", with Chang Ma and Huancheng Du.
Abstract: We examine the spillover effects of the ``Three-Red Lines" policy, a Chinese regulatory measure in 2020 that imposed leverage reduction requirements on the real estate sector. Using a firm-level exposure measure, we find that higher exposure to the real estate sector leads to more pronounced adverse impacts on firms' financing costs and real economic activities. Moreover, these spillover effects transmit through the production network, affecting both upstream and downstream sectors closely connected to real estate. Notably, trade credit plays a significant role in explaining these observed spillover effects.
''Hold-to-Maturity Accounting and Bank Runs,'' with Yu Yi and Shengxing Zhang.
Abstract: How does held-to-maturity accounting, aimed to limit the impacts of banks' unrealized capital loss on the regulatory capital measures, affect banks' exposure to deposit run risks when policy rates increase? And how should regulatory policies on HTM accounting be designed jointly with bank capital? This paper addresses these questions from both empirical and theoretical perspectives. We find that banks with lower equity capital ratios and higher uninsured deposit shares tend to increase the share of assets in held-to-maturity accounts during periods of monetary tightening. Disciplined by these findings, we develop a model of bank runs in which banks classify long-term assets as HTM or MTM by trading off the cost of equity issuance to meet the capital requirement when interest rate increases today against elevated future run risks when interest rate increases further in the future. Our analysis suggests that when banks underestimate the risk of interest rate increases or have limited liability to depositors once default, imposing a cap on held-to-maturity long-term assets and mandate more equity capital issuance may reduce the run risks of mid-sized banks in equity.
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