A Study On The "Credit-Cost" Channel Of Monetary Policy Transmission In China

According to the traditional monetary policy theory, tight monetary policy can be carried out to bring down inflation via curbing demand. However, since the late 1990s, the macro control in China has switched from direct pattern to indirect pattern. It always needs one to three years to evaluate whether the monetary policy is effective or not, for the tight monetary policy is usually accompanied by a long period of inflation, which is known as "price puzzle". Currently, China has entered a new interest rate hike cycle to relieve persistent inflationary pressure. It has recently become the focus of attention whether and when the prices would descend.This dissertation takes the "price puzzle" as a starting point, making a detailed study of monetary policy mechanism concerning "credit-cost" channel (CCC). On the basis of the analysis of theoretical and realistic conditions of CCC, this dissertation verifies the existence and significance of this channel in China, and discusses the factors that influence the function of CCC from the macro-level and micro-level. Researches have shown that different from traditional money channel and credit channel, CCC may deteriorate output-inflation trade-off in a short term and weaken the implementation effect of monetary policy.In particular, this dissertation can be concluded mainly as follows:Firstly, this dissertation provides theoretical foundation for the existence of CCC under the assumption of incomplete financial market, by introducing labour market into the monetary policy theoretical system and using a New-Keynesian Model which includes financial intermediaries. A key feature of the model is that both aggregate demand and aggregate supply are affected by monetary policy, and firms' reliance on bank loans may make aggregate supply sensitive to lending rate, which are in turn driven by the official rate controlled by the central bank plus a credit risk premium charged by banks on firms. The model reveals that even if under the hypothesis of flexible prices, considering the cost channel, the output effect of monetary policy may be lager than that of price effect. Therefore, the monetary policy is non-neutrality, and the cost channel weakens the effect of monetary policy and increases the social cost of anti-inflation policy. CCC needs three theoretical prerequisites. This dissertation discusses that China's economic and financial environment should basically meet the conditions to help CCC to effectively conduct monetary policy. These conditions include such four points as the dominance of bank indirect finance, the existence of bank loan relier, the monopoly banking market structure and the importance of working capital.Then, in order to testify the existence and significance of CCC in China, based on structural vector autoregressive model (SVAR) and impulse response function (IRF), this dissertation analyzes the effect that monetary policy is to the prices and the output by collecting the monthly data from 1999 to 2010. It shows that the cost channel weakens the effect of demand-side effect on inflation but strengthens that on output. Moreover, prices will still keep on rising for at least one year after tighting measures, but the output will be in a declining trend. Therefore, the monetary authorities should adopt forward-looking and predictable policy to offset the cost effect.It is emphasized that there is a relatively big real wage elasticity of labor supply in our labour market, which is a necessary condition for the remarkable supply-side effect of cost channel, and is connected with intertemporal substitution elasticity of labor supply and consumption, income elasticity of consumption and output elasticity of labor input. It shows that the characteristics of the micro-economic subjects are the main factors to influence the supply-side effect. Besides, by comparing the monetary policy effect between the urban and rural areas, it can be found because of the different industrial structure, financial structure, income level and consumption structure, the aggregate supply of the rural areas is more sensitive to the change of interest rate, while the aggregate demand of the urban areas is more sensitive to the change of interest rate. Therefore, as a tool to regulate aggregatge demand, monetary policy is more effective in urban areas. The further analysis supports the "price puzzle" as empirical evidence.The main conclusions in this dissertation include:(1) there really is a cost channel in theory and in practice, which makes output effect of monetary policy lager than that of price effect, so the monetary policy is non-neutrality; (2) tight monetary policy has little effect on rising prices, but may spur inflation over a short period; (3) credit risk premium charged by banks on firms shows an independent cost effect; (4) credit market undoubtedly performs a vital role in cost channel; (5) remarkable cost effect is connected with industrial structure, financial structure, income level and consumption structure. On this basis, this dissertation puts forward corresponding suggestions:(1) the central bank should improve their control level to deal with aggregate demand and to offset negative effect of the cost channel; (2) we will further deepen financial system reform to make aggregate supply less sensitive to lending price; (3) we should improve the income level and reduce the income gap of resident to strengthen the interest rate elasticity of consumption and investment.