A Macroeconomic Model of Structural Monetary Policy in China

ABSTRACT China's increasing use of structural monetary policy raises questions about its optimal role. This study investigates when and how SMP should be deployed using a multisector DSGE model incorporating distinct financing conditions and intermediary constraints for SOEs and POEs. We find that credit tightening disproportionately raises POE credit spreads, which conventional policy struggles to correct. Credit shocks significantly amplify resource misallocation and necessitate active SMP to address these specific distortions, stabilize the economy, and mitigate associated welfare losses. Our findings indicate that the justification for SMP is strongest when credit shocks significantly interact with underlying financial asymmetries between sectors.