Can Monetary Policy Achieve the Dual Targets of Stabilizing the Economy and the Leverage Ratio？ A Comparison Based on Different Levels of the Macroeconomic Leverage Ratio
LIU Zhexi, GUO Junjie, TAN Hanyu, CHEN Yanbin
School of International Trade and Economics, University of International Business and Economics; School of Finance, Central University of Finance and Economics; School of Economics, Renmin University of China
Summary:
In recent years, China faces the challenges of reduced economic growth and an increased macroeconomic leverage ratio. Thus, boosting the economy while stabilizing the leverage ratio has become an important issue for monetary policy authorities. However, no consensus has been reached about whether an expansionary monetary policy can balance these factors, as the effects of the macroeconomic leverage ratio on the monetary policy have rarely been considered. The effects of the normal state (a relatively lower macroeconomic leverage ratio) and a high leverage state on the transmission of monetary policy may differ substantially. Thus, whether an expansionary monetary policy can simultaneously stabilize the economy and the macroeconomic leverage ratio depends on which state the economy is in. We examine this issue by developing a dynamic general equilibrium model with a high-leverage environment and considering a firm's debt rollover. We find through a comprehensive model simulation that the effects of an expansionary monetary policy on stabilizing the economy and the macroeconomic leverage ratio in the normal state and a high-leverage state are very different. We test the model prediction using the state-dependent local projection (LP) method. The empirical results are consistent with the model prediction, suggesting that an expansionary monetary policy has very different effects in terms of stabilizing the economy and influencing the macroeconomic leverage ratio. Our empirical analysis confirms that the effects of the monetary policy are substantially different in normal and high-leverage states. In the normal state, an expansionary monetary policy can stimulate the economy while keeping the macroeconomic leverage ratio relatively stable in times of economic downturn so that the two targets can be managed simultaneously. In a high-leverage state, however, the effects of an expansionary monetary policy on stimulating the economy are greatly reduced. This also increases the macroeconomic leverage ratio and therefore is not able to achieve debt stabilization, as most debtors must pay back their interest expenses to roll over their debt in the high-leverage state, which weakens the transmission of the expansionary monetary policy. Most of the liquidity injected by the expansionary monetary policy then goes into the financial market instead of the real economy, thus weakening the stimulating effects on the real economy. Our findings have several policy implications. Our conclusions suggest that China should adopt a sound monetary policy to achieve the dual targets of stabilizing the economy and the macroeconomic leverage ratio. The monetary policy should remain modest and, unlike U.S., which entered a deleveraging phase after the 2008 global financial crisis, quantitative easing should not be applied. In the future, the authorities should also coordinate the fiscal policy and other macro policies to manage the dual targets of stabilizing the economy and the macroeconomic leverage ratio. Our study makes two main contributions. First, we distinguish the normal state from the high-leverage state and reveal that the effects of the monetary policy are substantially different in these two states. The various impacts of the macroeconomic leverage ratio on the monetary policy have rarely been examined in the literature. Second, on the basis of our theoretical analysis, we test the model's prediction that the effects of monetary policy are substantially different in the different states using the LP method. Our empirical results provide comprehensive evidence that stabilizing the economy and the macroeconomic leverage ratio simultaneously is challenging under an expansionary monetary policy in the high-leverage state. Overall, our paper extends the literature and provides theoretical and empirical support for China's recent sound monetary policy stance. Our study also has policy implications in terms of improving the effectiveness of China's monetary policy.
刘哲希, 郭俊杰, 谭涵予, 陈彦斌. 货币政策能够兼顾“稳增长”与“稳杠杆”双重目标吗？——基于不同杠杆环境的比较[J]. 金融研究, 2022, 505(7): 20-37.
LIU Zhexi, GUO Junjie, TAN Hanyu, CHEN Yanbin. Can Monetary Policy Achieve the Dual Targets of Stabilizing the Economy and the Leverage Ratio？ A Comparison Based on Different Levels of the Macroeconomic Leverage Ratio. Journal of Financial Research, 2022, 505(7): 20-37.
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