Revisiting the monetary transmission mechanism via banking from the perspective of credit creation

Hua Zhong; Zijian Feng; Zifan Wang; Yougui Wang; Hua Zhong; Zijian Feng; Zifan Wang; Yougui Wang

doi:10.3934/NAR.2024006

National Accounting Review

2024, Volume 6, Issue 1: 116-147. doi: 10.3934/NAR.2024006

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Research article

Revisiting the monetary transmission mechanism via banking from the perspective of credit creation

1.
School of Systems Science, Beijing Normal University, Beijing 100875, P. R. China
2.
Physics Department, University of Fribourg Chemin du Musée 3, 1700 Fribourg, Switzerland

Received: 31 October 2023 Revised: 20 February 2024 Accepted: 01 March 2024 Published: 07 March 2024
JEL Codes: E10, E43, E44, E51, E52, E58, G21, G28

Many transmission channels of monetary policy have been proposed to enrich and deepen the understanding of its mechanisms. However, some channels have not been clarified, particularly for those unconventional quantitative policies implemented after 2008 financial crisis. In this paper, we develop a unified model of a credit economy where bank regulations and decisions and loanable funds market are placed at a central position, while stocks and flows are incorporated with each other to formulate banks' credit creation and circulation. We find that bank regulations can induce some new channels of monetary transmission by imposing credit constraints, including the new bank capital channel, the credit supply channel, the new bank balance sheet channel, and the new bank risk-taking channel. Comparing these channels with the traditional ones, we underscore the impact of bank regulations on monetary transmission. As aggregate demand can be decomposed into two monetary flows generated by money circulation and bank lending respectively, the direct channels of monetary transmission to aggregate demand can be renewed as follows: the money channel, the narrow money circulation channel, the new bank lending channel, and the repayment channel. In addition, based on the relevant data from the United States, we have conducted vector autoregressive (VAR) impulse response analysis to confirm the effectiveness of some direct channels. Our work not only aids in revisiting the monetary transmission from a credit view but also facilitates the assessment of efficiency of monetary policy.
- monetary policy,
- monetary transmission channels,
- credit creation,
- bank regulation,
- loanable funds market
Citation: Hua Zhong, Zijian Feng, Zifan Wang, Yougui Wang. Revisiting the monetary transmission mechanism via banking from the perspective of credit creation[J]. National Accounting Review, 2024, 6(1): 116-147. doi: 10.3934/NAR.2024006

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Abstract

Many transmission channels of monetary policy have been proposed to enrich and deepen the understanding of its mechanisms. However, some channels have not been clarified, particularly for those unconventional quantitative policies implemented after 2008 financial crisis. In this paper, we develop a unified model of a credit economy where bank regulations and decisions and loanable funds market are placed at a central position, while stocks and flows are incorporated with each other to formulate banks' credit creation and circulation. We find that bank regulations can induce some new channels of monetary transmission by imposing credit constraints, including the new bank capital channel, the credit supply channel, the new bank balance sheet channel, and the new bank risk-taking channel. Comparing these channels with the traditional ones, we underscore the impact of bank regulations on monetary transmission. As aggregate demand can be decomposed into two monetary flows generated by money circulation and bank lending respectively, the direct channels of monetary transmission to aggregate demand can be renewed as follows: the money channel, the narrow money circulation channel, the new bank lending channel, and the repayment channel. In addition, based on the relevant data from the United States, we have conducted vector autoregressive (VAR) impulse response analysis to confirm the effectiveness of some direct channels. Our work not only aids in revisiting the monetary transmission from a credit view but also facilitates the assessment of efficiency of monetary policy.

References

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