Simulation to effect of monetary policy with constraint threshold

Li Ma, Jiayi Yang and Yong Niu

China Finance Review International, 2013, vol. 3, issue 4, 340-352

Abstract: Purpose - – Since monetary policy has great economic impacts, before the policy implementation, careful simulation combined with real economy movement condition can predict the policy implementation effect and reduce the cost of monetary policy implementation effectively. The paper aims to discuss these issues. Design/methodology/approach - – This paper selects the large commercial banks in China as the research objects, takes commercial bank capital adequacy requirement as the threshold constraint on the traditional monetary policy transmission path, and simulates the implementation effects of policy combination by applying computer technology. Findings - – It shows that the threshold effect of capital restriction policy will affect the transmission path of monetary policy, suppress the collective irrational behavior caused by the profit maximization behavior of commercial banks, and control the excessive fluctuation of macro economy. Research limitations/implications - – If using capital adequacy constraints threshold function scientifically and appropriately, the paper can effectively eliminate the negative effect of short-term traditional monetary policy transmission mechanism, control the macroeconomic overall risk within a predetermined range, and realize the goal of monetary policy with low cost. Originality/value - – Based on the theory of credit rationing from Stigliz and Weiss, combining threshold factors of capital restraint policy with the traditional monetary policy transmission path, this paper examines that the policy combination may lead to the implementation effect. The method of simulation used in this paper has not been found in other literatures, and the results have strong implications to set up a reasonable and scientific macro-prudential banking regulation framework.

Keywords: Simulation; Capital requirement; Monetary policy; Threshold (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:v:3:y:2013:i:4:p:340-352

DOI: 10.1108/CFRI-08-2012-0093

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