The Impact of Sectoral Differences in Financing and Budget Constraints on China's Conventional and Unconventional Monetary Policy

This paper uses Chinese data to calibrate a monetary policy model, so as to study the special impact of sectoral differences in financing and budget constraints on developing countries' monetary policy. The paper finds that real estate transactions, as a particularly effective monetary policy tool in China, would not be included in the conventional monetary policy toolbox of developed countries, while unconventional monetary policy tools effective in developed countries would not be equally effective in developing countries. The main reason for this conclusion is that the financing constraints imposed on private enterprises in developing countries are much stronger than those in developed countries. It is ignored by the mainstream literature that the strong financing constraints imposed on private enterprises could affect conventional monetary policy through the real estate financial accelerator and affect unconventional monetary policy through the crowding-out effect. The hard constraints on the private and the soft constraints on the state-owned jointly lead to China’s financial depression, which normalizes and institutionalizes the unconventional monetary policy