Research On Pro-cyclicality Of Commercial Banks’ Credit And Its Impact On The Effectiveness Of Monetary Policy In China

The behavior of commercial banks’ credit has pro-cyclicality. And such pro-cyclicalitymainly reflects in the following respects. During economic prosperity, commercial banks lowercredit standards, increase the total lending and inject a lot of liquidity. This easily leads to assetprice bubbles and economic overheating. In economic recession, commercial banks loancarefully, reduce the loan amount, and aggravate the economic recession. The pro-cyclicality ofcommercial banks’ credit exacerbates the volatility of the real economic. Monetary policyregulates the economy counter-cyclically. But the commercial banks’ credit behavior departuresfrom the purpose of monetary policy. It is bound to weaken the effectiveness of monetary policyin some extent.This paper first organizes theories about pro-cyclicality of commercial banks credit. And itcombines with the reform of the banking market to divide1998-2011into five stages. We foundthat the credit behavior of commercial banks generally follows the changes of the economicactivity in different stages. In empirical research, the paper proves the existence ofpro-cyclicality by quarterly data from1998to2011. Then the paper explores the impact ofpro-cyclicality of commercial banks’ credit on the effectiveness of monetary policy from thequalitative and empirical analysis. Finally, the paper puts forward some relevant policies andproposals on how to weaken the pro-cyclicality of commercial banks’ credit behavior. It aims atovercoming the harm brought about by the pro-cyclicality and the effective conduction ofmonetary policy in promoting China’s banking process.