The Effects Of New Monetary Policy Tools Under Macroeconomic Shocks

Under the accelerated evolution of global changes and the impact of the pandemic,China’s economic development is currently facing the triple pressure of demand contraction,supply shock and weak expectations.Against this background,it is not only important but necessary to introduce macroeconomic policies to stabilize the economy.But it is also important to make sure the policies are reasonable,precise and flexible.In this regard,new tools of monetary policy could be of great use in supporting weak sectors,preventing and resolving financial risks.In the context of macroeconomic shocks,this paper discusses the role of new monetary policy tools in alleviating financing constraints for small and medium-sized enterprises,stabilizing employment,and resolving bank risks.We first studies the impact of macroeconomic shocks on the overall economy,and compares the effects of new monetary policy tools and traditional monetary policy in this paper.We extend the SIR-DSGE framework developed in Eichenbaum et al.(2020,2021)to study the impacts of structural monetary policy in response to an epidemic shock on SMEs financing.The model distinguishes between large enterprises(LEs)and SMEs by their labor intensity in production and working capital constraints,and incorporates four commonly-used new monetary policy tools in China.New monetary policy tools take effects by incentivizing banks to offer financing support to SMEs.Results show that SMEs are more severely hit by the epidemic for their high laborintensity in production and tighter working capital constraints,and new monetary policy tools can mitigate the severity of an epidemic shock on the macroeconomy and SMEs,by lowering financing cost and increasing financing availability for SMEs.No matter for the economy as a whole or SMEs,new monetary policy tools yield better stabilization effects than conventional monetary policy.Further analysis shows that the combination of new monetary policy tools and conventional monetary policy is more desirable than without,and price-based instruments achieve higher social welfare than quantity-based.We then verify the effect of new monetary policy tools on stimulating labor employment of enterprises and promoting regional employment growth through bank credit channels and study the impact of macroeconomic shocks on policy effects.Specifically,taking the targeted RRR reduction as an example,by collecting the information from banks’ annual reports,we identify whether the bank has been targeted for RRR reduction.Combined with bank-firm lending data and bank branch distribution data,we construct the exposure for enterprises and regions to targeted RRR reduction.Using panel regression and difference-in-difference model,we study the impact of new monetary policy tools on bank credit issuance,enterprise labor employment and regional employment growth.The results show that:first,at the bank level,the targeted RRR reduction significantly promoted the overall credit issuance of banks,and also increased the number of bank loans to SMEs and agricultural firms;second,at the enterprise level,the targeted RRR reduction policy not only stimulates the labor employment for SMEs but also exhibits certain policy spillovers,promoting labor employment of other types of enterprises;third,at the regional level,targeted RRR reduction increases the growth rate of private and individual employed population,but the promotion effect on the total employed population and the urban unit employed population growth is not obvious;fourth,there is no evidence showing that the boosting effect of targeted RRR cuts on the employment varies with macroeconomic situations.We then explore the transmission process of risks induced by macroeconomic shocks from real economy to financial sector.We first construct a two-period general equilibrium model that includes households,firms,and banking sectors,to reveal the mechanism of macroeconomic shocks affecting bank risks.On top of that,using on a broad quarterly dataset of 14 major listed banks and their lending-related firm clients from 2017 to 2020,we empirically test the firm leverage channel through which macroeconomic shocks(COVID-19 as an instance)affect bank risks.The results show that:(1)the increase in firm leverage will significantly push up the risk of banks that provide credit services for these firms;(2)macroeconomic shocks may increase firm leverage,thereby boosting bank risks;(3)the implementation of new monetary policy tools has a risk mitigation effect by helping to reduce corporate leverage and bank risk under macroeconomic shocks;(4)the previous findings are more prominent among joint-stock banks,state-owned and large enterprises;(5)the new monetary policy tools is more effective in mitigating the risks of the joint-stock banks and banks whose corporate clients are more severely hit.