An Inquiry Into The "Credit Channel"of The Monetary Policy Transmission

Monetary policy is one of the most important instruments with which a government regulates the rational economy. For a monetary policy to take effect, however, the transmission mechanism plays a crucial role in its implementation. The transmission mechanism (or channel) varies with changes in the economy and the situation in the financial market. Since early Keynesian era and the rise of modern Monetarism, economists have formulated many new transmission mechanisms which include Tobin(s q theory, Credit Channels Theory and the related Asymmetric Effect Theory, the Wealth Effect Theory, Liquidity Effect Theory and Exchange Rate Effect on Net Export Theory, etc. This has led to a multi-channel prospect of the transmission mechanisms of the monetary policy.Among the different views cited above, there are starkly contradictory to one another, namely, the credit channel view and money channel view. The money channel view alleges that the reduction of banking reserves indicates the reduction of transaction deposits and leads to rise of interest rates. The initial impact of monetary policy on interest rates arises from the special characteristics of the liability side of banks( balance sheet, while the asset side is irrelevant. On the contrary, the credit channel view holds that the information asymmetry between banks and their customers will inevitably turn the decrease in banking reserve into the reduction of loans even without significant change of banks′liabilities. Here the initial impact of monetary policy on interest rates hinges on the features of asset side of banks( balance sheet while its liability side is irrelevant. The Credit channel can be subdivided into is divided into the banking credit channel and balance sheet (net worth of assets) channel which function in different directions.This paper attempts to analyze the credit channel view in some detail. The initial conclusions arrived at are as follows: (1) The necessary conditions for credit channel to take effect are partially existent in China. Thus the econometric analyses of researchers in this country based on the credit channel view are valid and acceptable.(2) In Chapter 3 of this paper, the author proved the existence of credit channel at least in theory, and obtained a so-called "complete diagram of credit channel". In this process of the analysis, the author grasped "the essence of the firms" of the financial intermediaries such as the commercial banks and put profitability (or "expected return") on the central position. Both the effect of banking credit channel and of balance-sheet channel with influence the supply of credit by the change of the expected return of financial intermediaries in the complete diagram of credit channel. On this way the analysis eschewed the dispute of whether a central bank can influence the credit supply of finan- cial intermediaries. Here what ought to be emphasized is that this analysis of credit channel (especially the balance-sheet channel) is based on the conditions of a highly developed and completely commercialized financial market. In the case of a highly centralized, non-commercialized economy, the dispute on the role of central bank would be meaningless.(3) In Chapter 4, the impact of the liberalization of interest rate on credit channel was analyzed in light of international experience, and also under the specific conditions in this country. The conclusion arrived at is, in a short period, the liberalization of interest rate may strengthen the banking credit channel in China as contrasted to international experience, while in a long run it may weaken the banking credit channel (this is identical with international experience). Meanwhile in both cases the liberalization of interest rate can strengthen the effect of balance-sheet channel.(4) Concerning the relationships between money channel and credit channel, the author analyzed the relation between banking credit channel and money channel, and also the relation between balance-sheet channel and money channel. It is pointed out that both...