Yiqing Xiao

Working papers

• “Monetary Policy Transmission Under Financial Repression”, with Kaiji Chen and Tao Zha.

Abstract: According to the conventional bank lending channel of monetary policy, wholesale funding in economies with well-developed financial markets moves negatively with retail deposits in response to changes in the monetary policy rate, thereby weakening the transmission of monetary policy. We present a theoretical model to demonstrate that in economies with financial repression, (i) retail deposits and wholesale funding comove positively in response to changes in the policy rate and (ii) wholesale funding strengthens, rather than weakens, the transmission of monetary policy to bank loans. We support these findings by bank-level evidence with deposit rate ceilings.

• “Bank Wholesale Funding, Monetary Transmission, and Systemic Risks: Evidence from China”, with Kaiji Chen 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.

• "Unintended Consequences of De-leverage Regulation to Monetary Transmission: The Case of China"

Abstract: I study how the de-leverage regulation on banks would affect monetary policy transmission to enterprises in China. China central bank has taken ease monetary policy since 2018, but private-owned enterprises’ financing cost increases and financing amount drops accordingly, as opposed to state-owned enterprises’. I argue that it is because of the de-leverage regulation on banks. Since non-state banks suffer more from the regulation, more credit goes to state banks, then state-owned enterprises. In the paper, I construct four sets of panel data and a theoretical model to show that private-owned enterprises get less loan with higher interest rate after the de-leverage regulation takes place, while state-owned enterprises are not affected. As a result, the default risk of private-owned enterprises increases, which further tightens their credit.

• "Restructuring 'Zombies' and Monetary Transmission in China"

Abstract: I study how the regulation of restructuring zombie firms influences the impact of monetary policy on output. By constructing three panel data sets and a theoretical model, I identify there are “Substitute Effect” and “Not-lending-out Effect”. “Substitute Effect” is that zombie and non-zombie firms are substitutes in getting loans from banks when there is monetary ease, and the removal of government subsidy to zombie firms would make more credit go to non-zombie than before. “Not-lending-out Effect” is that the decrease of subsidy for zombie firms leads to higher default risk of their loans, which does harm to banks’ return, thus banks are less willing to provide loans to all firms even there is monetary ease. These two effects have opposite impacts on the efficiency of monetary policy on output. And the theoretical results show that it is better to decrease the government subsidy to zombie firms gradually rather than eliminate it at once, which would generate efficiency loss of monetary policy.

Work in progress

• "Macroeconomic Policy Role of State-owned  Enterprises(SOEs) under Vertical Structure in China", with Yao Yao and Yong Wang.

• "Liquidity-based Strategic Default and Credit Market Frictions", with Boyang Mu

• "The Impact of Bank market power in developing countries", with Si Chen

• "The Gradual Reform of Real Estate Industry in China", with Xu Wang