Measuring the effects of monetary and fiscal policy shocks on domestic investment in China

Abstract

This paper investigates the dynamic effects of monetary and fiscal policy shocks on Chinese aggregate investment and three of its components. Our findings are as follows: First, we find that government spending shocks have no significant impact on aggregate investment or its components. Second, we compare the effectiveness of two kinds of monetary policy and show that shocks to the benchmark lending rate have a non-significant effect on aggregate investment, while shocks to the money supply have a positive and significant effect on aggregate investment only during periods of expansion. Third, a positive interest rate shock has a significant negative effect on state-owned investment, while it has an insignificant impact on private investment and foreign investment. Overall, our results show that both government spending policy and monetary policy have rather limited impacts on boosting domestic investment in China. Thus, it is not necessary for the Chinese government to implement a large-scale economic stimulus package to boost domestic investment and output growth.