Effect Of The Single European Currency Policy

The monetary transmission mechanism can be defined as the chain reaction of medi-variables to the changed signs of central bank, which finally results in the changes of real economy. The transmission mechanism and the effect of monetary policy is one of the most complicated subjects in monetary economy, and is also the favorite subject of foreign and domestic scholars. Currently the western academia agree that there are a variety of monetary policy transmission mechanisms which are classified as interest rate channel, credit channel, capital value channel and exchange rate channel.The scholars who support the existence of credit channel argue that financial assets could be divided into three forms which are cash, bond and loan. The loan is special and irreplaceable. The monetary policy functions on the investment by influencing the loan supply, and change the output in the end. The limit of credit channel is that the objectives which can be affected be credit channel are medium and small enterprises, because they have great dependence on the bank credit. While the constriction and expansion of bank credit have little impact on the large enterprises for they have strong ability of internal finance. On the other hand, with the development of financial innovation and financial instruments, the more and more substitutes for bank credit begin to weaken the credit channel.The financial system's impact on credit channel, to some extent, has the influence on the effect of monetary policy. In order to implement the unified monetary policy in Euro Area even European Union in the future, the European Central Bank has to take the relationship between the national financial system and credit channel into consideration. At same time the impact of the difference between national financial systems on the credit channel has great meaning to the expansion of European Union. If it is proved that different national financial systems have littleimpact on the credit channel, the expansion of EU would be supported.Based the theory of monetary economy, this thesis does some extension of the simple credit channel model of Bernanke & Blinder (1988). According to Schmidt's definition, financial system is composed of Financial Sector, Financial Pattern and Corporate Governance. After the numeralization of the national financial systems of 14 EU countries, Category Index is defined as the indicator of national financial systems. Then the regression is inducted to count the effect of credit channel in 14 EU countries which is used to do the correlation analysis between the Category Index. All of those lead to the conclusion that the difference of national financial systems has little impact on credit channel, or even no impact at all. This conclusion is put into practice in China's Duality Frame of Eastern China and Middle West China in the latter part of this thesis. The conclusion is drawn that China's monetary policy will reach the same reaction in Eastern China and Middle West China under the assumption of "New Duality Frame".This thesis consists of eight chapters. Chapter 1 is an introduction, which analyzes the development path of credit channel theory and the objective of this thesis. The retrospection of the general theories of monetary policy transmission mechanism is stated in the Chapter 2. Chapter 3 is the extension of simple credit channel model. Chapter 4 defines the financial system. Chapter 5 classifies the national financial systems in EU countries, and indicates them with Category Index. Chapter 6 does the correlation analysis to prove the relationship between financial system and credit channel. The conclusion in EU is put into practice in China in Chapter 7. The impact of "New Duality Frame" on China's credit channel is also reviewed in this chapter. In the last chapter, this thesis comes to a conclusion.