Advertisement

Transmission II: Liquidity and Lending

  • Michael BeggsEmail author
  • Luke Deer
Chapter
  • 135 Downloads

Abstract

This is the second of a pair of chapters opening the ‘black box’ of the banking system to understand the transmission mechanism through which the People’s Bank of China tried to influence its money and credit intermediate target variables. Here we present a critique of the ‘industrial organisation’ framework and develop an alternative that fits with Chinese policymakers’ statements. Banks in the aggregate are not constrained by a need to raise deposits, but by the cost and availability of liquidity in the form of reserves. We discuss how this manifested in the Chinese financial system—not so much to explain how policy was able to use the bank liquidity constraint to manage lending, but to show why this was difficult in the 2000s.

Keywords

Monetary policy China Liquidity Central banking Lending Credit 

References

  1. Acharya, Viral V., Jun Qian, and Zhishu Yang. 2017. “In the shadow of banks: Wealth management products and issuing banks’ risk in China.” Unpublished paper. Available at https://jrc.princeton.edu/sites/jrc/files/qian_jun-shadowbank-china-aqy-10feb17-all.pdf. 17 May 2019.
  2. Bernanke, Ben S., and Ilian Mihov. 1998. “The liquidity effect and long-run neutrality.” NBER Working Paper 6608.Google Scholar
  3. Chick, Victoria, and Sheila Dow. 2002. “Monetary policy with endogenous money and liquidity preference: A nondualistic treatment.” Journal of Post Keynesian Economics 24 (4), pp. 587–607.CrossRefGoogle Scholar
  4. Delatte, Anne-Laure. 2008. “Monetary policy and macrocontrol in China: The actual impact of window guidance.” Unpublished paper. Available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.651.7744&rep=rep1&type=pdf. 15 April 2019.
  5. Feinman, Joshua. 1993. “Estimating the open market desk’s daily reaction function.” Journal of Money, Credit and Banking 25 (2), pp. 231–247.CrossRefGoogle Scholar
  6. Freixas, Xavier, and Jean-Charles Rochet. 2008. Microeconomics of banking. Cambridge, MA: MIT Press.Google Scholar
  7. Geiger, Michael. 2010. Monetary policy in China: Institutions, targets, instruments and strategies. Dissertation, Bayerischen Julius-Maximillians-Universistat Wurzburg.Google Scholar
  8. Gerlach, Stefan, and Janet Kong. 2005. “Money and inflation in China.” Hong Kong Monetary Authority Research Memorandum 04/2005.Google Scholar
  9. Goodhart, Charles A. E. 1989. Money, information, and uncertainty. Houndmills: Macmillan.Google Scholar
  10. Green, Stephen. 2005. “Making monetary policy work in China: A report from the money market front line.” Stanford Center for International Development Working Paper 245.Google Scholar
  11. Hamilton, James D. 1997. “Measuring the liquidity effect.” American Economic Review 87 (1), pp. 80–97.Google Scholar
  12. Hamilton, James D. 1998. “The supply and demand for Federal Reserve deposits.” Carnegie-Rochester Conference Series on Public Policy 49 (1), pp. 45–52.Google Scholar
  13. He, Dong, Honglin Wang, and Xiangrong Yu. 2015. “Interest rate determination in China: Past, present, and future.” International Journal of Central Banking 11 (4), pp. 255–277.Google Scholar
  14. International Monetary Fund. 2000. Monetary and financial statistics manual. Washington, DC: International Monetary Fund.Google Scholar
  15. Kalecki, Michal. 1965. Theory of economic dynamics. London: Unwin University Books.Google Scholar
  16. Mehrling, Perry. 2011. The New Lombard Street: How the Fed became the dealer of last resort. Princeton: Princeton University Press.CrossRefGoogle Scholar
  17. Meulendyke, Ann-Marie. 1998. US monetary policy and financial markets. New York: Federal Reserve Bank of New York.Google Scholar
  18. Michell, Jo. 2012. Credit and investment in China: A flow-of-funds analysis. PhD thesis, SOAS, University of London.Google Scholar
  19. People’s Bank of China. 2005. Monetary Policy Report, Quarter 4. Beijing: People’s Bank of China.Google Scholar
  20. Poole, William. 1970. “Optimal choice of monetary policy instruments in a simple stochastic monetary model.” Quarterly Journal of Economics 84, pp. 197–216.CrossRefGoogle Scholar
  21. Porter, Nathan, and TengTeng Xu. 2016. “Money-market rates and retail interest regulation in China: The disconnect between interbank and retail credit conditions.” International Journal of Central Banking 12 (1), pp. 143–198.Google Scholar
  22. Strongin, Steven. 1995. “The identification of monetary policy disturbances explaining the liquidity puzzle.” Journal of Monetary Economics 35, pp. 463–497.CrossRefGoogle Scholar
  23. Sun, Guofeng. 2015. Reforms in China’s monetary policy: A frontbencher’s perspective. New York: Palgrave Macmillan.Google Scholar
  24. Toporowski, Jan. 2008. “Excess capital and liquidity management.” Levy Economics Institute Working Paper 549.Google Scholar
  25. Yan, Qingmin, and Jianhua Li. 2016. Regulating China’s shadow banks. Milton Park: Routledge.Google Scholar

Copyright information

© The Author(s) 2019

Authors and Affiliations

  1. 1.Political EconomyUniversity of SydneySydneyAustralia
  2. 2.FinanceUniversity of SydneySydneyAustralia

Personalised recommendations