۱- Introduction

۲- Literature review and hypothesis development

۳- Data and descriptive statistics

۴- Results

۵- Concluding remarks

References

Abstract

This study examines how the relationships between local governments and local enterprises moderate the effect of targeted monetary policies through different action-propagating mechanisms. First, we investigate the impact of monetary policies on enterprise investment in areas with different institutional environments. Second, we investigate the impact of monetary policies on state-owned enterprises (SOEs) with different property rights structures. Third, we examine how political connections can influence the action-propagating mechanism of monetary policies. We conclude that in China monetary policies have different effects on SOEs and on private enterprises with or without political connections. Specifically, local government interventions can significantly weaken and distort the effects of monetary policies, such that the intended reduction in investment is noticeably alleviated for SOEs and private enterprises with close links to local governments.

Introduction

Over the past 30 years, China’s reform and opening-up policy has led to continuous high-speed economic growth, which has attracted global attention. During this period of economic transition, the government’s aim has been to establish a market mechanism to allocate resources. In recent years, the Chinese government has gradually established and continuously improved its monetary policy, which is actively used to regulate the economy. Monetary policy not only affects the development of the macro-economy, but also has important effects on the micro-economic environments in which enterprises make decisions. China’s monetary policy is still undergoing a transformation into a fully market-based model, and its effectiveness has been the focus of academic discussion. Research has revealed that there is a time lag in the monetary policy transmission process that reduces the efficiency of the monetary policy (Zhou and Jiang, 2002; Dickinson and Liu, 2007; Fu and Liu, 2015). When the central bank loosens or tightens its monetary policy, the funds do not always flow to or from the industry or enterprise that the central bank intended to control. As local governments focus on promoting economic growth that optimizes local and regional development and investment, the central bank’s monetary policy can encounter local failures in its transmission mechanism (Sun, 2004; Song and Zhong, 2006). Research on the impact of macro policy on firms’ decision making at the micro level (Jiang and Rao, 2011) is still scarce. Although some studies (Hao et al., 2014) have explained macro-level economic growth problems from the micro perspective of enterprise investment, there are no studies examining how the monetary policy transmission mechanism affects micro enterprise investment behavior and capital structure in different institutional environments and under different property rights. In this study, we use an integrative perspective to investigate the interplay between macro-level monetary policy and micro-level investment and financing actions by enterprises. We aim to attain a better understanding of the mechanisms through which monetary policy influences the economic actions of enterprises.