Financial System And Monetary Policy Transmission Mechanism Study

Monetary policy is generally transmitted from financial sector, financial markets through interest rate, credit and asset price channels, affecting investment, consumer, import and export, at last the real economy. Money supply and interest rates usually are influenced at first. In turn, the loan supplying activities of commercial banks and the financing conditions of markets are affected, transmitting policy impacts to the real economy. Monetary authority usually adjusts investment and consumer and changes the level of output and price by adapting base money through financial measures.From the second half of 1997, aggregate demand of China suddenly turned downwards and the speed of economic growth also slowed down for the impact of Asian financial crisis. Facing the severe international and domestic economic situations, the central government of China conducted a series of expansionary monetary policies accompanying with positive fiscal policies in order that these measures could reduce the impact of Asian financial crisis on the Chinese economy and prevent the continually demand and price level declining with the intention to stem the economy from falling into recession. The central bank of China cut interest rates in eight times, resulting in a large reduction of interest rate level. Meanwhile, the central bank abolished the scope constraint on bank loans and reduced the required reserve rate. All the expansionary monetary policies are introduced, intending to stimulate domestic demand and offset the negative affect of international economic recession for keeping a relative higher economic growth. However, the expansionary policies did not succeed as originally expected. Neither investment nor consumer showed a clear rising trend. Banks were commonly unwilling to supply loans. Domestic investment and consumer grew in a very low speed while government invests alone for stimulating economic growth. So, it is pretty significant for monetary policy to effectively play roles in adjusting andstimulating economic growth by innovating and improving monetary transmission mechanism.In order to describe more clearly the obstacles of monetary transmission mechanism of China and find out institutional casualty I will systematically display the transmission mechanism theories of western monetary economists. Then, I will analyze the institutional disparities between two types of financial systems that represent in a very high degree most of western economies respectively and their implications for monetary policy transmission. Factors that affect the policy transmission in the New Emerging Economies will be discussed as well. I try to figure out the institutional elements that stem monetary policies from transmitting fluently in purpose of giving some policy suggestions for the improvement of the transmission mechanism of China. I will focus of the institutional factors during this process.Firstly, I will systematically display the transmission theories of western monetary economists. There are several schools of theory, while different school emphasize the roles of money, credit, interest rates, exchange rates, asset prices, commercial banks and other financial institutions playing in transmitting policy in different ways. Basically, 'Money view' and 'Credit channel' are the two mainstream views of the transmission theories, while the 'Credit channel' consists of 'Bank lending channel' and 'Balance sheet channel'. Actually, 'Credit channel' is not a truly independent or parallel channel with 'Money view' because it can help explain the 'Money view' in more detail from the timing, structure and depth of monetary policy innovation impacts. I will borrow terms as 'External finance premium', 'Net worth', 'Coverage ratio' and 'Financial accelerator', etc. to demonstrate the transmission mechanism and process of different channels in context of asymmetric information and credit market imperfections. The sizes of firms and their alternative funding sources, which may significantly influence the transmission process...