The Monetary Transmission Mechanism In China

Following the recent liquidity-effect models(limit-participation models) on monetary transmission mechanism, this paper constructs a dynamic stochastic general equilibrium model capturing the institutional features including (1) state sector and private sector; (2) a dual financial systerm consisting of the state banking system and the informal credit market; (3) fixed deposit rate and limitation on households'other saving channels except deposit; (4) fixed loan rate to relatively inefficient state-owned entrepreneurs(SOEs); (5) weakening credit control on state banks and (6) indepedence of monetary policies. This model is used to provide us a likely channel that shows how monetary transmission mechanism works in China and accords to our observations and empirical facts of Chinese economy well. Additionally, steady-state analysis indicates that partially reform such as interest rate marketization would be bad if not considering the whole economic situation and other reform policies.