Expansionary monetary policy and credit allocation: Evidence from China

We identify the impact of expansionary monetary policy in China during the 2008–2009 global financial crisis on the credit and investment allocation among firms. We obtain robust evidence that expansionary monetary policy led to the misallocation of bank credit to less productive firms after controlling for confounding factors. However, we find that investment increased more for more productive firms. Additional analyses show that this occurred partly because more productive firms hoarded cash before the crisis, and partly because less productive firms invested more in financial assets. •Expansionary monetary policy led to the allocation of bank credits to less productive Chinese firms.•The investment increased more for more productive firms in respond to the expansionary monetary policy.•Additional analyses showed that this is partly because less productive firms invest more in financial assets.