Credit Rationing: The Micro-foundation And Monetary Policy Implications Of Research

This thesis attempts to provide a theoretical explanation for the phenomenon of credit rationing in Chinese economy during 1998-2002. On this basis, implications of credit rationing for monetary policy and its influences on the efficacy of monetary transmission in the same period are discussed.Credit rationing is a problem of informational asymmetry associated with any credit market. Since credit market is not institutionally independent, the standard models based on perfect institutional environment cannot provide insights into the existence of credit rationing in China's transition economy. We introduce legal institutions and information sharing arrangements into our analysis, finding that low efficiency of legal enforcement of credit contracts and the absence of information sharing system were two important determinants for credit rationing in Chinese economy. Weak judicial enforcment of credit contracts reduced the screening and incentive effects of collateral, so that commercial banks had to raise collateral requirements and thus exercised more non-price rationing. On the other hand, with no information sharing arrangements, the reputation mechanism, which can to some extent replace legal enforcement as "the third- parry enforcement mechanism", did not exist. As a result, banks may ration credit to maximize profits. In addition, macroeconomic uncertainty during this period exacerbated banks' rationing behavior. Increase in uncertainty weakened banks' ability to predict loan revenue and forced them to adjust portfolio by holding more safe assets. Meanwhile, it also made banks to become more risk aversive, leading to the decline of loan/assets ratio. The two aspects were likely to give rise to credit rationing.Bank-lending channel is of the greatest importance in the transmission of monetary policy in China, which is determined by some institutional factors, such as government regulations on interest rate and exchange rate and imperfect institution structures that impede capital market's development. We reinterpret the credit channel of monetary transmission and the nature of monetary policy from the perspective of credit rationing. With credit rationing, monetary policy has a direct transmission channel but uncertain effects as well. Banks' unwillingness to lend and their rationing behavior are the main reasons why expansionary monetary policy since 1998 did not affect real economy as effectively as expected. We argue that only when agents' behavior is concerned can we really capture the efficacy of monetary policy on the economy. Moreover, with credit rationing, monetary policy may have adverse distributional and distortionary consequences. Even when it is effective under some circumstances, governments need to be aware of the high economic costs associated with the excessive reliance on this instrument.The whole paper includes 8 chapters: Chapter 1 introduces the basic concepts and research background. Chapter 2 gives a review of related literature. Chapter 3 explains how imperfect legal institutions lead to credit rationing. Chapter 4 discusses why credit rationing may arise because of the absence of information sharing arrangements. Chapter 5 explores banks' behavior when macro economy is highly uncertain. It shows credit rationing can change with changes in economic conditions. Chapter 6 analyzes the impacts of credit rationing on monetary transmission. Chapter 7 discusses the implications of credit rationing for monetary policy. Chapter 8 is the conclusion.