Research On Financial Acceleraror Mechanism Based On Banking Fragility

Since the 1990s, at the background of economic virtualization and financial globalization, the financial characteristics of modern business cycle have become increasingly prominent. The financial shock has sustainable and cyclical impact on the real economy, and causes rapid economic turmoil, even severe recession. Why small financial shock can lead to tremendous macroeconomic fluctuation, is worthy of study. However, the traditional economic cycle theory has failed on providing convincing explanation to the role of finance in business cycle. Therefore, we need a new theory to explain the causes and mechanism of "small shock and large fluctuation"In the context of financial business cycle, we use the new Keynesian dynamic framework to discuss the transmission mechanism between financial shocks and economic fluctuations. Based on the fact that the financial amplification mechanism is composed of two subsystems, the financial intermediaries and enterprises, we break through the only focus, the balance sheet, of the traditional financial accelerator mechanism, use the "generalized financial accelerator mechanism" as research topic, follow the research thinking of "business-banking-both interaction", try to explore the following three closely linked issues from two dimensions of business and bank. First, how the financial shock influence corporate investment through the balance sheet? Second, how the financial shock change the market liquidity and the vulnerability of the banking system after the balance sheet? Third, how the small financial shock cause tremendous macroeconomic volatility and smooth macroeconomic fluctuations under the interaction between the two factors above?We conduct the study from two dimensions of corporate and bank. First of all, from the perspective of the enterprise, we break the transmission mechanism of traditional financial accelerator mechanism into two micro-mechanisms of "net wealth effect" and "financial lever effect", clearly define and test the performance of the different elements of balance sheet in the amplification mechanism. Second, in the bank dimension, we analyze the "ratchet effect" among the asset price, pro-cyclical leverage and liquidity, and test the correlation between leverage ratio and bank fragility. Finally, by building a dynamic general equilibrium model including the bank default probability, we examine in detail the linkage between these two subsystems: reveal the generalized financial accelerator mechanism both from theoretical and empirical aspect; and compare with the traditional financial accelerator mechanism.The main findings are as follows:(1) On condition that there are financial frictions in the credit market, the financial accelerator mechanism is essentially decided by the "corporate net asset" and "financial leverage". The financial shock is accelerated and amplified through corporate balance sheet, and affect the corporate net asset and the "ratchet effect" between the external financial premium and financial leverage, then change the corporate investment scale, and ultimately exacerbate the economic fluctuation. The "net asset effect" and "financial leverage effect" above are widespread in Chinese manufacture level.(2) Under the pro-cyclical balance sheet management mode of the bank, asset price, leverage ratio and liquidity reinforce mutually, also form a "ratchet effect". The financial shock will continue self-reinforcing under the above mechanisms, and largely affect the bank system vulnerability. At present. China's banking system has been established to meet the conditions of the mechanisms above.(3) The corporate financial contracts established after the expected default loss of the bank link the above two subsystems, build the bridge between the bank leverage effect and the corporate cost effect; form the "generalized financial accelerator mechanism". The fragility of the bank sector plays a positive effect of amplifying the traditional financial accelerator effect. Thus, the functional departments should grasp and adjust the fragile state of the bank system in time, in order to choose the best point of implementation of the monetary policy and financial supervision. Particularly, the outstanding innovations of this paper are as follow. First, we expand the research areas of the traditional financial accelerator mechanism which focus only on the corporate balance sheet, build the theoretical framework of the generalized financial accelerator mechanism which includes the double balance sheets of bank and enterprise. Second, we improve the implicit assumption of "perfect bank" of the traditional financial accelerator mechanism, and point out that the bank fragility affects the mechanism and implementation condition of the financial accelerator effect. The conclusions and policy suggestions have certain practical implications for maintaining the financial stability and smoothing the economic fluctuations in the context of the financial crisis. Third, we use the default probability model in Merton(1974) to estimate the vulnerability of China's banking system for the first time, solve the problems of the inconsistent index and self-correlation variables when using the traditional index method to measure the bank fragility, and provide a practical research method for assessing the bank fragility comprehensively.