Journal Screenshot

International Journal of Academic Research in Business and Social Sciences

Open Access Journal

ISSN: 2222-6990

Monetary Policy and Deleveraging of Microfinance Institutions in China: A Dynamic Threshold Approach

Yue Li, Zariyawati Mohd Ashhari, Nazrul Hisyam Ab Razak, Wei Ni Soh

http://dx.doi.org/10.6007/IJARBSS/v14-i3/20863

Open access

By constructing the dynamic panel model and dynamic threshold model, this paper empirically analyzes the direct impact of monetary policy transmission on deleveraging initiatives of 204 microfinance institutions (MFIs) in China from 2012 to 2021, and the interactive effects of different monetary policy tools. The empirical investigations find that: the quantitative monetary policy transmission directs a negative impact on MFIs’ deleveraging, while the direct macro-control of price-based monetary policy tool is not significant. When two monetary policy tools interact, the inhibitory effect of quantitative monetary policy on MFIs’ deleveraging weakens once the price-based monetary policy tightening exceeds the threshold. Additionally, as the endogenous money multiplier amplifies the actual money quantity, price-based monetary policy starts to play its role in stable controllability, and MFIs gradually accept market-oriented interest rate mechanisms to adjust their deleveraging initiatives. The findings herein contribute to the significant implications of the study. The central bank should characterize the quantity control of quantitative monetary policy and the structural control of price-based monetary policy to formulate a scientific monetary policy. By improving the market-oriented interest rate mechanism of microfinance and coordinating with macroprudential regulations, it could achieve micro-prudential guidance on MFIs’ deleveraging progress, as well accelerate economic transition and structural leverage adjustment.

Acharya, V., & Naqvi, H. (2012). The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle. Journal of Financial Economics, 106(2), 349–366.
Adair, P., & Adaskou, M. (2015). Trade-off-theory vs. pecking order theory and the determinants of corporate leverage: Evidence from a panel data analysis upon French SMEs (2002–2010). Cogent Economics & Finance, 3(1), 1006477.
Akuetteh, J. (2019). Understanding the sustainability of credit unions using the pearls model: Credit unions in the Volta Region of Ghana in perspective. Doctoral dissertation], University of Ghana.
Amato, J. D., & Laubach, T. (2004). Implications of habit formation for optimal monetary policy. Journal of Monetary Economics, 51(2), 305–325.
Anarfo, E. B., Abor, J. Y., Osei, K. A., & Gyeke-Dako, A. (2019). Monetary policy and financial inclusion in sub-Sahara Africa: a panel VAR approach. Journal of African Business, 20(4), 549–572.
Apergis, N., Christou, C., Hayat, T., & Saeed, T. (2020). US Monetary policy and herding: Evidence from commodity markets. Atlantic Economic Journal, 48, 355–374.
Ayayi, A. G., & Sene, M. (2010). What drives microfinance institution’s financial sustainability. The Journal of Developing Areas, 303–324.
Aydin, Ü., A?an, B., & Aydin, Ö. (2021). Herd behavior in crypto asset market and effect of financial information on herd behavior. ArXiv Preprint ArXiv:2104.00763.
Ba, S. (2022). The New Cycle and New Finance in China. Springer.
Bartscher, A. K., Schularick, M., Kuhn, M., & Wachtel, P. (2022). Monetary policy and racial inequality. Brookings Papers on Economic Activity, 2022(1), 1–63.
Beck, T., Colciago, A., & Pfajfar, D. (2014). The role of financial intermediaries in monetary policy transmission. Journal of Economic Dynamics and Control, 43, 1–11.
Beker, V. A. (2019). IS THE FINANCIAL SYSTEM PREPARED FOR A NEW FINANCIAL CRISIS? Economic and Social Development: Book of Proceedings, 96–113.
Benedictow, A., & Hammersland, R. (2020). A financial accelerator in the business sector of a macroeconometric model of a small open economy. Economic Systems, 44(1), 100731.
Bernanke, B. S. (2020). The new tools of monetary policy. American Economic Review, 110(4), 943–983.
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143.
Boivin, J., Kiley, M. T., & Mishkin, F. S. (2010). How has the monetary transmission mechanism evolved over time? In Handbook of monetary economics (Vol. 3, pp. 369–422). Elsevier.
Bolognesi, E., Compagno, C., Miani, S., & Tasca, R. (2020). Non-performing loans and the cost of deleveraging: The Italian experience. Journal of Accounting and Public Policy, 39(6), 106786.
Borio, C., & Zhu, H. (2008). Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism, BIS Working Paper No. 268. Retrieved from Bank or International Settlements Website: Http://Www. Bis. Org/Publ/Work268. Pdf.
Borio, C. E. V., Farag, M., & Tarashev, N. A. (2020). Post-crisis international financial regulatory reforms: a primer.
Boti?, S. (2020). The Reaction of Central Banks to the Economic Crisis Caused by the Covid-19 Pandemic. Acta Universitatis Danubius. Œconomica, 16(6), 191–203.
Buch, C. M., Bussiere, M., Goldberg, L., & Hills, R. (2019). The international transmission of monetary policy. Journal of International Money and Finance, 91, 29–48.
Ca’Zorzi, M., Dedola, L., Georgiadis, G., Jarocinski, M., Stracca, L., & Strasser, G. (2020). Monetary policy and its transmission in a globalised world.
Chadha, J., Corrado, L., Meaning, J., & Schuler, T. (2020). Bank reserves and broad money in the global financial crisis: a quantitative evaluation (Issue 2463). ECB Working paper.
Chan, S. (2019). Understanding China’s monetary policy: an institutional perspective. Post-Communist Economies, 31(1), 1–18.
Chen, Hong, Wang, T., & Yao, D. D. (2021). Financial network and systemic risk—a dynamic model. Production and Operations Management, 30(8), 2441–2466.
Chen, Hui, Chen, Z., He, Z., Liu, J., & Xie, R. (2023). Pledgeability and asset prices: Evidence from the Chinese corporate bond markets. The Journal of Finance, 78(5), 2563–2620.
Chi, X. (2021). Credit Misallocation and Disintermediation in China’s Infrastructure Financing. Department of Economics, University of Colorado Boulder.
Cho, Y., & Kim, S. (2021). International Transmission of Chinese Monetary Policy Shocks to Asian Countries. Bank of Korea WP, 18.
Corrado, L., Schuler, T., & Chadha, J. (2020). Bank Reserves and Broad Money in the Global Financial Crisis: A Quantitative Evaluation.
Cuadro Sáez, L., López Vicente, F., Párraga Rodríguez, S., & Viani, F. (2020). Fiscal policy measures in response to the health crisis in the main euro area economies, the United States and the United Kingdom. Documentos Ocasionales/Banco de España, 2019.
Dang, V. D., & Nguyen, K. Q. B. (2021). Monetary policy, bank leverage and liquidity. International Journal of Managerial Finance, 17(4), 619–639.
Dell’Ariccia, G., Laeven, L., & Suarez, G. A. (2017). Bank leverage and monetary policy’s risk?taking channel: evidence from the United States. The Journal of Finance, 72(2), 613–654.
Di Bartolomeo, G., Rossi, L., & Tancioni, M. (2011). Monetary policy, rule-of-thumb consumers and external habits: a G7 comparison. Applied Economics, 43(21), 2721–2738.
Drehmann, M., & Yetman, J. (2018). Why you should use the Hodrick-Prescott filter–at least to generate credit gaps.
Duqi, A. (2023). The Role of Banks in Promoting Post-disaster Economic Growth. In Banking Institutions and Natural Disasters: Recovery, Resilience and Growth in the Face of Climate Change (pp. 59–98). Springer.
Fontana, G., Realfonzo, R., & Passarella, M. V. (2020). Monetary economics after the global financial crisis: what has happened to the endogenous money theory? European Journal of Economics and Economic Policies, 17(3), 339–355.
Fostel, A., & Geanakoplos, J. (2015). Leverage and default in binomial economies: a complete characterization. Econometrica, 83(6), 2191–2229.
Fraisse, H., Lé, M., & Thesmar, D. (2020). The real effects of bank capital requirements. Management Science, 66(1), 5–23.
Galati, G., & Moessner, R. (2018). What do we know about the effects of macroprudential policy? Economica, 85(340), 735–770.
Girdzijauskas, S., Streimikiene, D., Griesiene, I., Mikalauskiene, A., & Kyriakopoulos, G. L. (2022). New approach to inflation phenomena to ensure sustainable economic growth. Sustainability, 14(1), 518.
Giri, F., Riccetti, L., Russo, A., & Gallegati, M. (2019). Monetary policy and large crises in a financial accelerator agent-based model. Journal of Economic Behavior & Organization, 157, 42–58.
Gott, G. (2023). Microcredit and the Financial Frontiers of Racial Neoliberalism. Gott, G.(2022). Microcredit and the Financial Frontiers of Racial Neoliberalism. Journal of Law and Political Economy, 2(2).
Greenbaum, S. I., Thakor, A. V, & Boot, A. W. A. (2019). Contemporary financial intermediation. Academic press.
Gujarati, D. N., & Porter, D. C. (2009). Basic Econometrics (5th ed.). The McGraw-Hill, New York, USA.
Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93(2), 345–368.
Hirakata, N., Sudo, N., & Ueda, K. (2018). Capital injection, monetary policy, and financial accelerators. 31st Issue (June 2013) of the International Journal of Central Banking.
Hohberger, S., Priftis, R., & Vogel, L. (2020). The distributional effects of conventional monetary policy and quantitative easing: Evidence from an estimated DSGE model. Journal of Banking & Finance, 113, 105483.
Jarallah, S., Saleh, A. S., & Salim, R. (2019). Examining pecking order versus trade?off theories of capital structure: N ew evidence from J apanese firms. International Journal of Finance & Economics, 24(1), 204–211.
Jiménez, G., Ongena, S., Peydró, J.-L., & Saurina, J. (2012). Credit supply and monetary policy: Identifying the bank balance-sheet channel with loan applications. American Economic Review, 102(5), 2301–2326.
Krokida, S.-I., Makrychoriti, P., & Spyrou, S. (2020). Monetary policy and herd behavior: International evidence. Journal of Economic Behavior & Organization, 170, 386–417.
Lenar?i?, ?. (2019). Complementaries and Tensions between Monetary and Macroprudential Policies in an Estimated DSGE Model (Application to Slovenia).
MacKie?Mason, J. K. (1990). Do taxes affect corporate financing decisions? The Journal of Finance, 45(5), 1471–1493.
Masera, R. (2019). Leverage and risk-weighted capital in banking regulation. Available at SSRN 3471119.
Monnet, E., & Puy, D. (2020). Do old habits die hard? Central banks and the Bretton Woods gold puzzle. Journal of International Economics, 127, 103394.
Muriu, P. (2022). What explains provisioning behaviour in the banking industry? Evidence from an emerging economy.
Myers, S. C. (1984). Capital structure puzzle. National Bureau of economic research Cambridge, Mass., USA.
Osifo, S. J., & Omoregbe, O. (2020). Customer relationship management as a tool for improving bank performance and nation building. Nigerian Academy of Management Journal, 15(2), 10–24.
Ottonello, P., & Perez, D. J. (2019). The currency composition of sovereign debt. American Economic Journal: Macroeconomics, 11(3), 174–208.
Patalano, R., & Roulet, C. (2020). Structural developments in global financial intermediation: The rise of debt and non-bank credit intermediation.
Prokopowicz, D. (2020). Analysis of the effects of post-2008 anti-crisis mild monetary policy of the Federal Reserve Bank and the European Central Bank. International Journal of Small and Medium Enterprises and Business Sustainability, 5(1), 1–35.
Ricca, L. T., Jucá, M. N., & Junior, E. H. (2021). Tax benefit and bankruptcy cost of debt. The Quarterly Review of Economics and Finance, 81, 82–92.
Rostagno, M., Altavilla, C., Carboni, G., Lemke, W., Motto, R., Saint Guilhem, A., & Yiangou, J. (2021). Monetary policy in times of crisis: A tale of two decades of the European Central Bank. Oxford University Press.
Ryan-Collins, J., Kedward, K., & Chenet, H. (2023). Monetary-fiscal policy coordination: Lessons from Covid-19 for the climate and biodiversity emergencies. UCL Institute for Innovation and Public Purpose WP, 4.
Seo, M. H., & Shin, Y. (2016). Dynamic panels with threshold effect and endogeneity. Journal of Econometrics, 195(2), 169–186.
Shkodina, I., Melnychenko, O., & Babenko, M. (2020). Quantitative easing policy and its impact on the global economy. Financial And Credit Activity-Problems of Theory and Practice, 2, 513–521.
Takáts, E., & Vela, A. (2014). International monetary policy transmission. BIS Paper, 78b.
Tarek Al-Kayed, L., Raihan Syed Mohd Zain, S., & Duasa, J. (2014). The relationship between capital structure and performance of Islamic banks. Journal of Islamic Accounting and Business Research, 5(2), 158–181.
Vinayagathasan, T. (2013). Inflation and economic growth: A dynamic panel threshold analysis for Asian economies. Journal of Asian Economics, 26, 31–41.
Wang, G.-J., Feng, Y., Xiao, Y., Zhu, Y., & Xie, C. (2022). Connectedness and systemic risk of the banking industry along the Belt and Road. Journal of Management Science and Engineering, 7(2), 303–329.
Wang, T. (2020). Monetary policy instruments. In The Handbook of China’s Financial System (pp. 63–86). Princeton University Press Princeton, NJ.
Wang, Y., Wang, X., Zhang, Z., Cui, Z., & Zhang, Y. (2023). Role of fiscal and monetary policies for economic recovery in China. Economic Analysis and Policy, 77, 51–63.
White, W. R. (2012). Ultra easy monetary policy and the law of unintended consequences. Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute Working Paper, 126.
Woodford, M. (2010). Financial intermediation and macroeconomic analysis. Journal of Economic Perspectives, 24(4), 21–44.
Zhou, B., Wang, S., Gao, H., & Wang, H. (2022). Research on Monetary Policy Implementation and Industrial Structure Transformation Under COVID-19—Evidence From Eight Economic Zones in Mainland China. Frontiers in Public Health, 10, 865699.

(Li et al., 2024)
Li, Y., Ashhari, Z. M., Razak, N. H. A., & Soh, W. N. (2024). Monetary Policy and Deleveraging of Microfinance Institutions in China: A Dynamic Threshold Approach. International Journal of Academic Research in Business and Social Sciences, 14(3), 187–208.