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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
"Preferential Credit Policy with Sectoral Markup Heterogeneity," with Yuxuan Huang, Xuewen Liu, Zhikun Lu, and Yong Wang, accepted at Journal of International Economics.
Abstract: Many emerging economies employ preferential credit policies that target selected sectors. This paper quantifies the implications of such policies for aggregate productivity and welfare. Using Chinese firm-level data from 2009–2020, we first document that sectors with higher markups receive larger credit subsidies and exhibit higher revenue-based productivity. Motivated by these facts, we develop a multi-sector quantitative model with endogenously determined markups and calibrate it to match the distribution of sales both within and across sectors. We find that preferential credit subsidies raise aggregate productivity and welfare by reallocating market shares toward high-markup sectors. These gains persist in an extended framework with endogenous firm entry.
“Aggregate and Distributional Impacts of LTV Policy in China,” with Qing Wang, Tong Xu and Tao Zha, 2025, Quantitative Economics, 16, 1361-1408.
Download here for the NBER working paper version.
Abstract: We study how China’s loan-to-value (LTV) policy affects mortgage markets and household consumption, focusing on an abrupt and unprecedented relaxation in LTV limits for secondary houses from 2014Q4 to 2016Q3. Using a rich dataset of over three million loan-level records from a major Chinese commercial bank, supplemented by survey data on urban household finances, we analyze how this policy shift influenced mortgage demand, house prices, and consumption across household groups and at the aggregate level. We find that this LTV relaxation, aimed at promoting housing investments, spurred a mortgage boom, especially in primary home mortgages, while crowding out household consumption among middle-aged, high-education households. Motivated by these findings, we develop and calibrate a dynamic equilibrium model that distinguishes between primary homes for housing services and secondary houses for investment. When the LTV limit for secondary houses is relaxed, demand for these properties surges, increasing house prices and capital gains. Unlike prior literature, we identify a housing investment channel in which these capital gains enable existing homeowners—particularly middle-aged and high-income households—to upsize their primary residences. Rising house prices then drive further demand and mortgage borrowing, amplifying the effects of the LTV policy change and reducing these households’ non-housing consumption.
"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.
“Comment on “Collateral-Based Monetary Policy: Evidence from China,” forthcoming, International Economic Review.
Abstract: This discussion evaluates Fang, Wang, and Wu’s study on collateral-based monetary policy in China, which exploits the 2018 expansion of eligible collateral under theMedium-Term Lending Facility. The paper develops a theoreticalmodel-linking collateral eligibility to bond pricing, employs a novel triple-difference strategy using dual-listed bonds, and finds that policy reduces bond spreads in both secondary and primary markets. The discussion highlights the paper’s methodological contributions, situates its findings within China’s structural monetary policy framework, and raises future research questions on credit allocation, systemic risks, and the effectiveness of structural versus conventional monetary tools.
“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
“A Trade-off Between Monetary Policy Transmission and Systemic Risk in China ,” with Yiqing Xiao and Tao Zha, R&R at Journal of Monetary Economics.
Download here for the NBER working paper version.
Abstract: We study how interbank funding links monetary policy transmission to systemic risk in a banking system with heterogeneous access to deposit funding. Using bank-level data from China, we show that monetary policy easing reallocates liquidity through the interbank market: state banks raise deposits and lend in the interbank market, while non-state banks expand loans through interbank borrowing. But during economic downturns, heavier interbank borrowing is associated with higher systemic risk. To interpret these facts, we build a structural model with deposit-rich and deposit-poor banks and interbank rollover risk. Monetary policy easing reallocates liquidity and boosts lending, but it also raises run risk.The model reveals a macroprudential trade-off: a regulatory limit on interbank funding weakens monetary policy transmission but reduces systemic risk.
"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.
“Deposit Regulation and Monetary Transmission in China,” with Yiqing Xiao and Tao Zha.
Download here for the NBER working paper version.
Abstract: In well-developed financial markets, retail deposits and wholesale funding comove negatively in response to monetary policy changes. This negative comovement weakens the transmission of monetary policy. By contrast, our study finds that in emerging markets 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 monetary policy to bank lending. We develop a theoretical model that highlights the significant influence of deposit regulation on monetary policy transmission in the context of the worlds 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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