Shadow banking, investment and interest rate transmission: Evidence from macroprudential policy in China

In this study, we investigate the impact of shadow banking on the effectiveness of price-based monetary policy, which uses interest rates to stabilize prices as an intermediate target. Based on the data analysis of Chinese A-share listed companies from 2010 to 2021, we find that shadow banking significantly increases the sensitivity of investment to the benchmark interest rate and increases the effectiveness of the price-based monetary policy. By considering the implementation of the macroprudential assessment (MPA) system as a quasi-natural experiment, we find that the sensitivity of investment to the benchmark interest rate decreases significantly in non-state-owned enterprises (non-SOEs). Additionally, the MPA system is more likely to influence the sensitivity of investment to the interest rate in non-SOEs if they are uncollateralized, non-high-tech, or competitive. In the transition stage of promoting the price-based monetary policy, the Chinese government should actively regulate the development of shadow banking to alleviate the financing difficulties faced by non-SOEs and improve the efficiency of the interest rate transmission mechanism.