The nexus of peer-to-peer lending and monetary policy transmission: Evidence from the People's Republic of China

This paper empirically investigates how the level of peer-to-peer (P2P) lending affects monetary policy transmission in the People's Republic of China (PRC). Using state-dependent local projections, we find that the macroeconomic effects of monetary policy shocks are dampened during the boom phase of the P2P lending market. The impulse responses of industrial production and inflation are significantly negative in the non-boom state. In contrast, the responses of industrial production and inflation are muted in the boom state. Set against the context of stricter regulation on P2P lending since 2017, our results indicate that the significant scaling back of P2P lending activity and its gradual decline in the PRC could enhance the effectiveness of monetary policy transmission. Our paper also suggests that further work is needed on interactions between financial innovation and monetary policy. • P2P lending in the People's Republic of China weakens monetary policy effectiveness. • Industrial production and inflation in the non-boom state of P2P lending respond to monetary policy shocks as expected. • In the boom state of P2P lending, responses of industrial production and inflation to monetary policy shocks are muted. • Policymakers need to find the appropriate balance between financial innovation and the monetary management of the economy.