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Associate Professor of Economics at Emory University

CQER Senior Research Fellow at Federal Reserve Bank of Atlanta

Associate Editor: International Economic Review; China Economic Review

Email: kaiji.chen@emory.edu


A. Publications and forthcoming papers



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.










 

  

 

 




B. Working Papers


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.




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.


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.




Abstract: This paper reviews recent literature on China's macroeconomic development,

emphasizing the critical role of the gradualist approach over the past four decades. Beyond

China's structural transformation, we explore various aspects such as high saving rates, the

housing boom, an expanding current account surplus, and rising inequality. We propose

a unifying framework that encapsulates key development stages, contrasting gradualism

with a laissez-faire counterfactual. Our analysis illustrates how China's gradual policy re-

forms, amidst highly imperfect financial markets, have effectively helped spur GDP growth

throughout its macroeconomic evolution. We highlight the tradeoffs between accelerating

GDP growth and safeguarding China's long-term financial stability.



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. 


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.




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

 

D. Discussions