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How do the dual effects of financial development change the transmission of monetary policy? – Evidence from China

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  • Xu, Yueli
  • Ji, Xiaodan
  • Zhan, Shuwei
  • Zhan, Minghua

Abstract

Based on the different driving factors of financial development, the paper divides the financial development of developing countries into dual effects, namely marketization effects (ME) and scale effects (SE). The former can reduce financial frictions, but the latter cannot. Using evidence from China, the paper investigates the dual effects of financial development on monetary policy effectiveness. Results show that China's financial development improves the effect of monetary policy on the whole, which is different from some research conclusions in developing countries only based on the credit channel, and also different from those of developed countries. This is because that ME and SE have different effects on the interest rate channel and the credit channel, and the total effect of monetary policy is the sum of the effects of these two channels.

Suggested Citation

  • Xu, Yueli & Ji, Xiaodan & Zhan, Shuwei & Zhan, Minghua, 2023. "How do the dual effects of financial development change the transmission of monetary policy? – Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:ecofin:v:68:y:2023:i:c:s106294082300075x
    DOI: 10.1016/j.najef.2023.101952
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    References listed on IDEAS

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    1. Mishra, Prachi & Montiel, Peter & Pedroni, Peter & Spilimbergo, Antonio, 2014. "Monetary policy and bank lending rates in low-income countries: Heterogeneous panel estimates," Journal of Development Economics, Elsevier, vol. 111(C), pages 117-131.
    2. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
    3. Christina D. Romer & David H. Romer, 1990. "New Evidence on the Monetary Transmission Mechanism," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 149-214.
    4. Takaoka, Sumiko & Takahashi, Koji, 2022. "Corporate debt and unconventional monetary policy: The risk-taking channel with bond and loan contracts," Journal of Financial Stability, Elsevier, vol. 60(C).
    5. Mr. Robert J. Corker & Ms. Wanda S Tseng, 1991. "Financial Liberalization, Money Demand, and Monetary Policy in Asian Countries," IMF Occasional Papers 1991/002, International Monetary Fund.
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    Cited by:

    1. Zhu, Chaowei & Zhang, Fan & Zhang, Yuling, 2023. "Revisiting financial opening and financial development: A regulation heterogeneity perspective," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 181-197.
    2. Ni, Jianhui & Ruan, Jia, 2024. "Contagion effects of external monetary shocks on systemic financial risk in China: Evidence from the Euro area and Japan," The North American Journal of Economics and Finance, Elsevier, vol. 70(C).

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    More about this item

    Keywords

    The dual effects of financial development; Interest rate channel; Credit channel; Monetary policy effectiveness;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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