| 1 IntroductionHow does the monetary transmission mechanism depend on a country's financial structure? This is a question required to answer because financial structure not only matters for economic growth as detailed in Goldsmith (1969) and Demirgiic-Kunt and Levine (2001), but also has a large potential impact on macro economic efficiency in terms of inflation-output variability frontier and the effectiveness of monetary policy in terms of monetary transmission mechanism as detailed in Gurley and Shaw (1960), BIS (1995), Dornbusch et al (1998). Bernanke, Gertler and Gilchrist (1999) recognize that the inclusion of a richer financial structure, at least assigning a nontrivial role for banks into the monetary transmission mechanism, would be a worthwhile theme for research.In China, most of related research follow the model of Goldsmith (1969), focusing on the relationship between financial structure and economic growth, while there are only occasional papers that intuitively recognize the role of financial structure in the process of monetary transmission mechanism, but it lacks basically a systematic analysis to follow the models of Gurley and Shaw (1960), Bernanke (1995), Dornbusch et al (1998), Cecchetti and Krause (2001), focusing on the modern views of the monetary transmission mechanism, which assign a central role to financial structure.Based on the facts mentioned above and my experience working on business cycle and computable general equilibrium modeling, this dissertation selects to study on the insights into financial structure and its relation to the monetary transmission mechanism, in particular, the role of financial structure in the transmission of monetary policy in China.2 Fundamental FrameworkThis dissertation builds on the general theme of financial structure in determining the nature, scope and strength of monetary transmission mechanism, with a focus on a theoretical and empirical analysis of the money and credit channels. Doing so is due to the facts that China is still characterized as a bank-based structure of financial system and is in the transformation to a market-oriented structure of financial systemFigure 1 depicts schematically an eclectic overview of the major channels of monetary transmission mechanism distinguished in the literature. This exhibit also works as the fundamental reasoning framework of the dissertation.As illustrated in Figure 1, there are four kinds of monetary transmission channels considered in this theme, which exclude the channel of expectations and uncertainty.The first kind of monetary transmission channels includes the interest rates channel and the direct monetary channel, which runs from policy interest rate to final demand through its impact on the real costs of capital. The second kind of monetary transmission channels includes the credit channels, which are distinguished into three sub-channels, i.e., the banking lending channel, the balance sheet channel, and the bank capital channel. The third kind of channels is the asset prices channels, in particular the equity (stock and bond) price channels, which include the investment-related Tobin's q channel and the consumption-related wealth channel. The fourth kind of channels is the exchange rate channel. Each channel is related to an implicit financial structure and the financial structure impacts on the scope and relative strength of the concerned kind of monetary transmission channels.3 Outline of the DissertationThis dissertation consists of seven chapters in addition to the introduction. The thrust is to investigate both theoretically and empirically the role of financial structure in the process of monetary transmission. Setting out this kind of objective raises immediately the question of balance. The first two chapters aim to provide the theoretical frontier and as well an analytical framework in a portfolio-balance general equilibrium model for the role of financial structure in the transmission process of monetary policy. The chapters 3 through 6 aims to estimate an... |
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