Monetary stimulation, bank relationship and innovation: Evidence from China

Using China's four trillion yuan stimulus package of 2008 (4 Trillion Plan) as an exogenous shock, we find that monetary stimulation could benefit the real economy to some extent. Specifically, compared with propensity-score-matched control firms, firms more likely affected by the stimulus plan (e.g., bank-connected firms) are granted with 18% to 24% more patents afterwards. Further evidence shows that the effect of monetary stimulation is more pronounced in firms with financial constraints, in firms located in regions with lower house price growth, and in firms with better corporate governance. Finally, monetary stimulation also increases R&D expenditure, leaving innovation efficiency unaffected.