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Involuntary excess reserve and heterogeneous transmission of policy rates to bank lending rates in China

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Abstract

This study examines the impact of liquidity and involuntary excess reserves on interest rate pass-through in China. Employing Error Correction Model estimation based on a sample of 86 banks over the period of 2000–2013, the study finds that liquid banks can better shield against tightening monetary policy and adjust lending rate sluggishly. In contrast, banks with larger involuntary excess reserves tend to increase lending interest rates more rapidly in response to tightening monetary policy. We conclude that unwanted liquidity may lead to risk-taking behaviours which are detrimental to financial stability.

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Acknowledgements

We are grateful to the Editor - Robert Kunst and the anonymous reviewer for the insightful feedback during the review process.

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Authors and Affiliations

  1. School of Business and Management, RMIT University Vietnam, Ho Chi Minh City, Vietnam

    Thai V. H. Nguyen & Tra Thi Thu Pham

  2. Glasgow School of Business and Society, Glasgow Caledonian University, Glasgow, G4 0BA, UK

    Agyenim Boateng

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  1. Thai V. H. Nguyen
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  2. Agyenim Boateng
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  3. Tra Thi Thu Pham
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Corresponding author

Correspondence to Agyenim Boateng.

Appendices

Appendix 1

See Table 4.

Table 4 Summary statistics for excess reserve regression variables
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Appendix 2

See Table 5.

Table 5 Unit root tests for excess reserve regression variables
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Appendix 3

See Table 6.

Table 6 Excess reserve regression results
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Appendix 4

See Fig. 1.

Fig. 1
figure 1

Histogram for interest rate (i)

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Appendix 5

See Fig. 2.

Fig. 2
figure 2

Histogram for IER1

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Appendix 6

See Fig. 3.

Fig. 3
figure 3

Histogram for IER2

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Appendix 7

See Fig. 4.

Fig. 4
figure 4

Histogram for LIQ

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Nguyen, T.V.H., Boateng, A. & Pham, T.T.T. Involuntary excess reserve and heterogeneous transmission of policy rates to bank lending rates in China. Empir Econ 57, 1023–1044 (2019). https://doi.org/10.1007/s00181-018-1468-x

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  • DOI: https://doi.org/10.1007/s00181-018-1468-x

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