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How does the money market development impact the bank lending channel of emerging Countries? A case from China

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  • Zhan, Shurui
  • Tang, Yangfei
  • Li, Shuai
  • Yao, Yaojun
  • Zhan, Minghua

Abstract

Transforming from quantitative-based instruments to price-based instruments is the primary goal of the monetary policy transformation in emerging economies. In essence, this process is gradually replacing the interest rate channel with the credit channel from the perspective of the monetary policy transmission mechanism, which is mainly achieved by promoting financial development to reduce the financial friction. However, there are opposite effects of financial development on the bank lending channel; thus, the topic is controversial. Using banks’ data from 2010 to 2018, this paper studies whether and how the money market development weakens the effect of the bank lending channel in China. The result shows that the mechanism through which the money market development influences the bank lending channel is realized by affecting the substitution elasticity of the asset and liability structure of banks’ balance sheets. Different from the theoretical expectation, the effect of the money market development on the bank lending channel is nonsignificant in China but appears to be weakened when the interest rate market-oriented reform is considered. However, further research based on structural analysis demonstrates that the money market development exerts heterogeneous effects on the bank lending channel under different types of sub-markets and different characteristics of the banks considered.

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  • Zhan, Shurui & Tang, Yangfei & Li, Shuai & Yao, Yaojun & Zhan, Minghua, 2021. "How does the money market development impact the bank lending channel of emerging Countries? A case from China," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:ecofin:v:57:y:2021:i:c:s1062940821000206
    DOI: 10.1016/j.najef.2021.101381
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    1. Japan Huynh, 2023. "The monetary policy pass-through mechanism: Is the search-for-yield incentive at work?," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-12, December.
    2. Li, Shuai & Zhan, Shuwei & Zhan, Shurui & Zhan, Minghua, 2023. "How does financial development change the effect of the bank lending channel of monetary policy in developing countries?—Evidence from China," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 502-519.

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    More about this item

    Keywords

    Money market; Banks’ asset and liability structure; Bank lending channel; Monetary policy transmission;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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