Government Debt,Bank Liquidity And Regulation Of Monetary And Macroprudential Policy

It is of great academic value and practical significance to explore the operational mechanism of monetary policy and macroprudential policy tools to smooth out the liquidity gap in the context of intertwined fiscal and financial risks,in order to resolve the internal financial risks of banks and maintain financial security and stability.In view of this,this paper examines the possible bank liquidity risk arising from government debt shocks in the context of the "double helix" of fiscal and financial risks in China and the policy context of the transformation of the monetary policy regulatory framework and the improvement of the macro-prudential regulatory framework for cross-border capital flows,and explore the mechanism behind the impact of government debt on commercial banks’ liquidity is analyzed based on two different economic states(closed economy and open economy)under the context of the mainstream economic research paradigm,.Moreover,on the basis of identifying the mechanism of government debt affecting commercial banks’ liquidity.Also,this paper explores the effectiveness of the central bank’s monetary policy tools and macro-prudential policy tools for cross-border capital flow regulation in preventing and mitigating commercial banks’liquidity risk during the period of government debt expansion,and proposes targeted and constructive policy recommendations accordingly.On the empirical side,this paper empirically tests the dynamic responses among three time series data sets of government debt ratio,interbank market interest rate and financing premium using time-varying parameter vector autoregressive model(TVP-VAR)to present the association between government debt,commercial bank liquidity and financing cost.The results show that the government debt expansion shock will push up the interbank borrowing market interest rate,implying that the government debt expansion will intensify the liquidity constraint of commercial banks.Moreover,an increase in the size of government debt will lead to an increase in the level of financing premium,and government debt will aggravate the cost of financing in the credit market.Supported by the empirical results,this paper constructs dynamic stochastic general equilibrium models based on two economic states,closed economy and open economy,respectively,to explore the mechanism of government debt expansion exacerbating the liquidity shortage of commercial banks in closed economy and open economy,and further discusses the effects of lending facility-based liquidity management tools that are based on the monetary policy collateral framework and macroprudential tools for cross-border capital flow regulation on regulating the relationship between government debt and commercial banks’ liquidity.The study finds that:First,as far as the impact mechanism is concerned,government debt can affect commercial bank liquidity through two paths:the fiscal-financial leverage linkage mechanism and the real exchange rate channel.The expansion of government debt in a closed economy exacerbates the degree of liquidity constraints of commercial banks through the fiscal-financial leverage linkage mechanism.As commercial banks are the main holders of government debt,with the expansion of government debt,the large holdings of government debt by commercial banks will worsen the balance sheet position of commercial banks,leading to the climbing of bank leverage and the formation of fiscal-financial leverage linkage.Under the leverage constraint of commercial banks,the increasing leverage of banks means to a certain extent that the financial risk increases subsequently.Due to the principal-agent problem brought about by the information asymmetry between commercial banks and depositors,the increase of bank risk increases the difficulty of commercial banks to obtain funds,and commercial banks cannot obtain sufficient funds to replenish in the market,which eventually leads to the depletion of bank liquidity and intensifies the liquidity constraint of banks degree.In an open economy,the exchange rate is an important transmission channel(Gao Huiqing,2020),and the expansion of government debt deteriorates the balance sheet position of commercial banks,leading to fiscalfinancial leverage linkage and also the foreign capital outflow,pushing up the real exchange rate and causing depreciation of the local currency.As the foreign debt of the banking sector is denominated in foreign currency,the net assets of banks fall sharply under the pressure of local currency depreciation,further aggravating the liquidity constraint of commercial banks.Second,liquidity management tools based on the monetary policy collateral framework can alleviate commercial banks’ liquidity shortages during periods of government debt expansion,but their effectiveness varies depending on different regulation methods such as quantity regulation,collateral type adjustment and interest rate regulation.The monetary authority’s quantitative regulation by adjusting the collateral ratio of lending facility-based liquidity management tools effectively mitigates the adverse impact of government debt expansion on commercial banks’ liquidity by increasing the overall size of central bank liquidity supply.However,the effectiveness of quantity regulation is affected by the adjustment of collateral types under the monetary policy collateral framework.When government bonds are used as the only collateral,the countercyclical adjustment of the collateralization rate of the lending facility-type liquidity management tool makes commercial banks’ credit flows more preferable to the government sector.With the inclusion of corporate loans in the collateral universe,the adjustment of the collateral rate for corporate loans can lead commercial banks to increase the supply of corporate loans,realizing a diversion effect of bank liquidity from the government sector to the corporate sector.Finally,compared with the quantitative regulation of single collateral rate adjustment,the introduction of the regulation mode of medium-term lending facility rate can form the interest rate transmission mechanism of "lending facility rate lending rate",and the liquidity transmission channel of monetary policy can be effectively unblocked.Third,under the open economy,the medium-term lending facility liquidity management tool is less effective in mitigating the impact of government debt on bank liquidity through the real exchange rate channel,and the counter-cyclical regulation of cross-border capital flow regulation tool can weaken the real exchange rate channel of government debt affecting commercial bank liquidity through the regulation of cross-border capital flow,and the effect of the dual-pillar regulation framework of "medium-term lending facility+cross-border capital regulation "is better.But the effectiveness of the implementation of countercyclical regulatory tools for cross-border capital flows varies depending on the change in targeting.Macroprudential rules that target changes in corporate credit can effectively mitigate the impact of government debt expansion on commercial banks’ liquidity.However,macro-prudential rules focusing on government debt cannot mitigate the liquidity shortage of banks caused by the expansion of government debt.The expansion of government debt has formed a pattern of "high government debt and low corporate loans".According to the counter-cyclical macroeconomic control rules,the regulator will impose higher tax rate on foreign debt of commercial banks when focusing on government debt,which will intensify the pressure of capital flight and contradict the original purpose of macroprudential supervision.The innovations of this paper are mainly reflected in the following aspects:First,the innovation of research perspective.On the one hand,this paper reveals the causes of commercial banks’ liquidity shortage from the perspective of government debt.Most of the literature has explained the causes of commercial banks’ liquidity shortage in terms of monetary policy,interbank market frictions and changes in regulatory conditions.In this paper,the study of bank liquidity is introduced from the fiscal spillover effect,and the different mechanisms of government debt affecting commercial bank liquidity in two different economic states(closed economy and open economy)are separately discussed to enrich the research dimension of fiscal spillover effect and bank liquidity.On the other hand,this paper theoretically validates the effects of current monetary policy liquidity management tools and cross-border capital supervision tools in coping with bank liquidity shortages caused by government debt expansion in the context of monetary policy operational framework transformation and financial openness.Second,the extension of the theoretical model.On the one hand,this paper introduces a collateral-based framework of lending facility-type monetary policy instruments in the financial sector.Under the monetary policy collateral framework,the implementation of lending facilitytype liquidity management tools requires the provision of collateral.To this end,this paper analyzes the effects of liquidity management tools by drawing on the collateral constraint model constructed by Kiyotaki and Moore(1997)and Iacoviello(2005)to characterize lending facility-type monetary policy instruments in the financial sector that embody collateral.On the other hand,this paper identifies the mechanism of the effect of government debt on bank liquidity in an open economy by portraying the typical fact that commercial banks hold government bonds based on the model of Aoki et al.(2018).At the same time,this paper introduces the dual-pillar regulation framework of "medium-term lending facility+crossborder capital regulation " based on the model of Aoki et al.(2018).In terms of policy recommendations,based on the results of empirical tests and theoretical model analysis,this paper puts forward relevant recommendations in terms of broadening the structure of government debt holders and improving the regulation ability of monetary policy and macroprudential policy tools.First,the marketization of China’s local debt should be continuously improved to guide more diversified bond-holding subjects and reduce the occupation of commercial bank funds by government bonds.Through the diversification of government debt holding subjects,sharing the liquidity shortage caused by expansionary fiscal policy to commercial banks due to external adverse shocks can reduce the degree of economic recession and improve the stability of the domestic economy.Secondly,in the process of gradually broadening the structure of government bond holders,the collateral channel effect of monetary policy is actively brought into play,and the adjustment of the scope of central bank collateral realizes the parallel regulatory objectives of monetary policy in terms of aggregate and structure,and improves the regulatory effect of monetary policy.Meanwhile,in the process of deepening financial openness,macroprudential policy should strengthen the supervision of cross-border capital flows,stabilize the real exchange rate by regulating the scale of crossborder capital flows,and weaken the exchange rate channel through which government debt affects commercial bank liquidity.