An Analysis Of The Impact Of The Shadow Banking System On China's Monetary Policy

This paper is to analyze the impact of the shadow banking system on monetary policy in China. According to the references, the researchers focused on the subject of the impact of the shadow banking system on the effectiveness of monetary policy or the transmission mechanism, however, studies about how the shadow banking system affects monetary policy in different economic cycle are relatively less. Therefore, from the perspective of the shadow banking system, this article tests monetary policy asymmetry in different growth rate of the shadow banking system by using TVAR model.Firstly, we give a definition of the shadow banking system and describe its components. Then we demonstrate how the shadow banking system influence the general monetary policy tools, the intermediate targets and the ultimate goals of monetary policy, and also how other factors affect monetary policy. In the following parts, on the basis of calculating the shadow banking system in China we select variables of total price level, the aggregate production, the broad money supply, short-term interest rate and the shadow banking from 1990 to 2014, and set the shadow banking as the threshold variable to test the results of all types of shocks to price volatility, economic growth and broad money supply(M2) while the economic system is at the period of high and low increase in the shadow banking. The empirical results show that the threshold value is 15.99, namely, when the actual growth rate of the shadow banking is under 15.99 percent, the economic system is in the low regime, on the contrary, the system is in the high regime. At the same time, the threshold variable passed the test under the 95% percentage confidence level, proving that the TVAR model exists non-linear effect. In addition, generalized impulse response function reveals shocks have substantially larger effects on the inflation when the system is in the low-shadow banking regime, while in the high-shadow banking regime on output growth and M2, especially the price effect is clearer than the output effect in two regimes, which indicate the existence of the asymmetric impacts on the monetary policy under the shadow banking system. Futhermore, the shadow banking system will lead to the fluctuation of the total price, the aggregate output and M2 in the low regime, but continuous positive effects in the high regime, indicating it undermined the monetary policy's effectiveness. What's more, by calculating how the exante probability of being in the tight-shadow banking regime responds to various types of exogenous shocks, we find that large positive shocks to the output, the inflation and M2 can substantially increase the likelihood of being in the low regime, these results suggest that it also has the asymmetric effects of monetary policy of the shadow banking system. And finally, we give some recommendations relate to the shadow banking supervision, monetary policy changes with time and etc.