Collateral-based monetary policy and corporate employment: Evidence from Medium-term Lending Facility in China

Abstract

Collateral-based monetary policy tools in China aim to guide credit resources to the real economy by injecting base money into banks to support policy objectives, such as promoting employment. This study examines the effects of Medium-term Lending Facilities (MLF) on employment through the bank lending channel. The results of difference-in-differences estimation show that post-MLF implementation, employment growth and labor cost growth of firms with high MLF exposure increase by 8.04% and 5.74%, respectively. The channel test shows that commercial banks with high bond holdings significantly increase lending after MLF implementation, which subsequently increases employment for borrowers of these banks. This effect is more pronounced for firms with high dependence on external financing, strong financing constraints, no qualifications to issue bonds, high sales growth, and belonging to industries supported by industrial policies. MLF also improves the quality of employment, which in turn significantly increases the total factor productivity of firms. Finally, MLF also has a significant positive effect on local aggregate employment growth. Focusing on firm labor hiring decisions, which are crucial to real economic development and social stability, this study has important theoretical and practical implications for furthering our understanding of the effectiveness and feasibility of collateral-based monetary policy tools.