Open Economies Review

, Volume 25, Issue 1, pp 123–161 | Cite as

Banking and the Macroeconomy in China: A Banking Crisis Deferred?

  • Vo Phuong Mai Le
  • Kent MatthewsEmail author
  • David Meenagh
  • Patrick Minford
  • Zhiguo Xiao
Research Article


The downturn in the world economy following the global banking crisis has left the Chinese economy relatively unscathed. This paper develops a model of the Chinese economy using a DSGE framework with a banking sector to shed light on this episode. It differs from other applications in the use of indirect inference procedure to test the fitted model. The model finds that the main shocks hitting China in the crisis were international and that domestic banking shocks were unimportant. However, directed bank lending and direct government spending was used to supplement monetary policy to aggressively offset shocks to demand. The model finds that government expenditure feedback reduces the frequency of a business cycle crisis but that any feedback effect on investment creates excess capacity and instability in output.


DSGE model Financial frictions China Crises Indirect inference 

JEL Classification

E3 E44 E52 C1 



We thank Yi Wang for her assistance with collecting Chinese data. This paper was prepared for the 2013 Konstanz Seminar on Monetary Theory and Policy. Zhiguo Xiao acknowledges the support of the National Science Foundation of China (Grant #11001059 and 11171074). We thank, without implication Haizhou Huang and other partcipants of the 2013 Konstanz Seminar and members of the La Pour-Societe of Fudan University for helpful comments.


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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  • Vo Phuong Mai Le
    • 1
  • Kent Matthews
    • 2
    Email author
  • David Meenagh
    • 2
  • Patrick Minford
    • 2
  • Zhiguo Xiao
    • 3
  1. 1.University of SheffieldSheffieldUK
  2. 2.Cardiff Business SchoolCardiff UniversityCardiffUK
  3. 3.Fudan UniversityShanghaiPeople’s Republic of China

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