Bank loans and the effects of monetary policy in China: VAR/VECM approach

In this paper, we test the differential effects of monetary policy shock on aspects of banksʹ balance sheets (deposits, loans, and securities) across bank categories (aggregate banks, state banks, and non-state banks) as well as on macroeconomic variables (output, consumer price index, exports, imports, and foreign exchange reserves). We do so by estimating VAR/VEC Models to uncover the transmission mechanisms of Chinaʹs monetary policy. Also we identify the cointegrating vectors to establish the long-run relationship between these variables. By using monthly aggregate bank data and disaggregated data on bank and loan types from 1996 to 2006, our study suggests the existence of a bank lending channel, an interest rate channel and an asset price channel. Furthermore, we discuss and explore the distribution and growth effects of Chinaʹs monetary policy on Chinaʹs real economy. In addition, we investigate the effects of Chinaʹs monetary policy on Chinaʹs international trade. Finally, we identify the cointegrating vectors among these variables and set up VEC Models to uncover the long-run relationships that connect the indicators of monetary policy, bank balance sheet variables and the macroeconomic variables in China.