The Influence Of Shadow Banking System On Monetary Policy Effectiveness

Because the financial industry in our country implements separate operation and is under strict supervision, the financial demand has been greatly constrained. Along with the advancement of marketization of interest rate, the acceleration of financial sector reform and opening up and financial innovation emerge in endlessly, the size of the shadow banking system in China is also growing, and create a financial system which can perform the role of credit creation, term transformation and liquidity support. However, the new financial system, which is also known as shadow banking system, is less supervised. As is known to all, the implementation of a country’s monetary policy needs to be conducted through specific channels, so as to realize the objectives of economy growth and price control. Our ever-expanding and complex shadow banking system will undoubtedly have certain impact on the conduction of monetary policy and its effects. Therefore, this paper focuses on the impact of China’s shadow banking system on the effectiveness of monetary policy, in order to deepen the understanding of the shadow banking system and its impact on the understanding of monetary policy in order to provide some reference for improving the existing literature to guide monetary policy practice.This paper first reviews the literature of the shadow banking and monetary policy’s relations, then define the clear meaning and essential characteristics of the shadow banking system. After that, this paper introduces credit markets into the classic IS-LM model, making sure that the shadow banking system is included in the unified analytical framework, so we can analyze the impact of shadow banking system on monetary policy and its specific mechanism. Then, this paper uses the indirect method to estimate the scale of China’s shadow banking system, collects the relevant monthly macroeconomic data and use SVAR model for empirical analysis of the impact of shadow banking system on monetary policy effectiveness. The conclusions are as follows:(1) the shadow banking system and the traditional bank credit has reciprocal relationship, which means the shadow banking system has complementary and alternative effects on traditional bank credit;(2) The development of the shadow banking will to shunt of the liquidity of the whole society, and this part itself is not included in the statistics, thus increasing the difficulty to achieve the intermediary goals of monetary policy;(3)the credit creation function of the shadow banking system increases the money supply of the whole society and pushes up the price level, thereby it has a negative effect on the effectiveness of the monetary policy. Finally, based on the theoretical analysis and empirical conclusions,this paper puts forward the corresponding policy recommendations from two aspects:one is to strengthen the supervision of shadow banking system and the other is to reform monetary policy.