Center for Pacific Basin Studies

The Center for Pacific Basin Studies promotes cooperation among central banks in the Pacific Basin and provide insight into and analysis of economic policy issues affecting the region.

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Pacific Basin Notes

Occasional series of the FRBSF Economic Letter

Fiscal Multiplier at the Zero Bound: Evidence from Japan


Ethan Goode, Zheng Liu, and Thuy Lan Nguyen | May 24, 2021

The United States has implemented large-scale fiscal policy measures to help households and businesses cushion the economic fallout from the COVID-19 pandemic and to strengthen the recovery. The Federal Reserve has also supported the economy by keeping its policy rate at the zero lower bound. Evidence from Japan suggests that, in a sustained zero-bound environment, an unexpected increase in government spending has much larger and more persistent effects on real GDP, and even more so when the economy is in a recession.

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Working Papers

Bank Risk-Taking and Monetary Policy Transmission: Evidence from China

Working Paper 2020-27

Li • Liu • Peng • Xu | August 2020

We present evidence that monetary policy easing reduces bank risk-taking but exacerbates capital misallocation in China after implementing the Basel III capital regulations in 2013. The new regulations tightened bank capital requirements and introduced a new risk-weighting approach to calculating the capital adequacy ratio (CAR). To meet tightened capital requirements, a bank can boost its effective CAR by raising capital or by increasing the share of lending to low-risk borrowers. Using confidential loan-level data from a large Chinese commercial bank, merged with firm-level data on a large set of manufacturing firms, we document robust evidence that a monetary policy expansion raises the share of new bank loans to state-owned enterprises (SOEs) after 2013, but not before, because SOE loans receive high credit ratings under government guarantees. Since SOEs are on average less productive than private firms, shifts in bank lending toward SOEs exacerbate capital misallocations, reducing aggregate productivity. We construct a two-sector general equilibrium model with bank portfolio choices and show that, under calibrated parameters, an expansionary monetary policy shock raises the share of bank lending to SOEs, leading to persistent declines in total factor productivity that partially offset the expansionary effects of monetary policy.

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