Transmission mechanisms from monetary policy to the interest rate of informal lending and their effects
(2.Finance Research Institution of Wenzhou University 325035)
【Abstract】Whether the transmission channels of monetary policy are smooth determines the effect of monetary policy. To reveal the specific transmission channels through which monetary policy affects the real economy, a significant volume of literature has evolved in recent years. Such literature has focused on the formal financial market represented by the banking system without systematically accounting for the role of informal financial markets. This framework does not fully apply to China’s financial environment, which is characterized by a dual financial structure and a dual-track interest rate system. Given the limited literature on the effect of monetary policy on the informal financial sector, we try to theoretically analyze this issue and expand the research on the transmission mechanisms of monetary policy with regard to the opportunity cost, asset substitution, balance sheet and adverse selection channels. On this basis, we empirically examine the effect of monetary policy on the interest rate of informal finance via the route of “the implementation of monetary policy—change of credit market—adjustment of interest rate of informal finance” with the regression analysis model, the principal component analysis method and the mediation test method. Using statistical data on China’s macro-economy and survey data from the People’s Bank of China from the first quarter of 2005 to the fourth quarter of 2015, we investigate how monetary policy affects the interest rate of informal finance by accounting for the specific role of the credit lending market and controlling China’s macroeconomic condition and interest rate liberalization reform. We find that the effect of monetary policy on the interest rate of informal finance is consistent with theoretical expectations. A tightened monetary policy can cause an upward shift of the interest rate of informal finance. Furthermore, the effectiveness of price-based policy instruments is different from that of quantity-based policy instruments. Although the reserve-deposit ratio significantly changes the interest rate of informal finance, the interest rate policy does not. We address this issue from the perspective of “hidden cost.” Further study has found significant mediation effects in the transmission mechanisms, namely that monetary policy stance affects the interest rate of informal finance by influencing the credit lending rate, credit amount and bank risk taking. This indicates that the credit market has a significant mediation effect through the opportunity cost, asset substitution and adverse selection channels. We make contribution in two main aspects. Firstly, we try to open the black box of the transmission mechanisms of monetary policy in the informal financial market through theoretical analysis of four different channels. Secondly, we empirically test the total effects and mediation effects of monetary policy on the interest rate of informal finance. We conclude that in respect of monetary policy, quantity regulation, price regulation and risk regulation has direct and indirect effects on the interest rate of informal finance via the credit market. We suggest that a series of financial market reforms, such as financial industry’s transformation and upgrading dominated by the banking system, should be steadily promoted to stop the interest rate of informal finance from substantially deviating from the nominal credit lending rate. Furthermore, under the current supply-side structural reform, China’s government should implement quantity regulation in coordination with structural adjustment by considering the fund raising difference between the formal and informal systems.
【Keywords】 monetary policy; interest rate of informal lending; mediation effects;
. ① Due to the space limitation, the unit root test results about the residual term of each cointegration regression equation are not presented, which are available upon request.
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