A MICROFOUNDATION FOR THE TRANSMISSION MECHANISM OF MONETARY POLICIES IN JAPAN

The distinction between the behaviour of an individual bank and the behaviour of banks is not well recognized among the existing money and banking literature. What is really needed in terms of policy implications is not the theory about the behaviour of an individual bank but that of the entire banking sector. The key element that differentiates the theory of the behaviour of the banking sector from that of an individual bank is the money market. It is only by endogenizing the money market that we can obtain the theory of the behaviour of the banking sector and can analyze formally how changes in policy parameters are (or are not) transmitted to the entire banks' portfolio (in particular, to the banks' lending behaviour).; The thesis starts with the discussion about the micro behaviour of an individual bank. Specifically, the optimal reserve management policy of a bank is analytically derived. The derived optimal policy is one of the so-called "simple policies" in the cash management or inventory literature. The emphasis of the analysis is on carefully spelling out the relationship of "simple policies" to cost structure which can be completely characterized for single period models. The main policy implication obtained is that transfer costs hamper the transmission mechanism of monetary policies.; After the investigation of the bank's reserve management, institutional characteristics and actual practices of Japanese banks are examined. Topics discussed are balance sheets, characteristics of loan markets, default risk, collateral, required minimum balances, the determination of nominal lending rates and characteristics of securities markets. Based upon the discussion on these topics as well as the results of the bank's reserve management model, a banking firm model is built. The problem that a bank is facing turns out to be one of concave programming. The problem is solved and a vector function which summarizes the behaviour of an individual bank is derived.; Though each bank is a price taker in the money market, it is also banks that determine the market rate. The market equilibrium condition and the implicit function theorem are used to endogenize the market rate, and another vector function which summarizes the behaviour of the entire banking sector is derived.; Based upon the theory of "banks" (not "a bank"), the effectiveness and the transmission mechanism of each policy instrument are examined. The injection and the withdrawal of high powered money to and from the banking sector by (1) the sale and the purchase of bills, (2) the central bank credit and (3) the sale and the purchase of government bonds have the clearest transmission route through changes in the marginal opportunity cost of reserves. Changes in the marginal opportunity cost of reserves are also an important route in the case of (4) raising (or lowering) the reserve rate, though there are another kind of effects involved in it as well. (5) Changing the discount rate has no direct impacts on the banks' portfolio. It can affect the banks' portfolio only indirectly.; The thesis has endogenized the behaviour of the banking sector, given the behaviour of the monetary authorities and that of the real sector, and thus provides a microfoundation for the beginning of the sequential money creation story.; Some empirical studies are also presented.