Empir Econ https://doi.org/10.1007/s00181-018-1468-x Involuntary excess reserve and heterogeneous transmission of policy rates to bank lending rates in China 1 2 Thai V. H. Nguyen · Agyenim Boateng · Tra Thi Thu Pham Received: 2 November 2016 / Accepted: 8 May 2018 © Springer-Verlag GmbH Germany, part of Springer Nature 2018 Abstract This study examines the impact of liquidity and involuntary excess reserves on interest rate pass-through in China. Employing Error Correction Model estimation based on a sample of 86 banks over the period of 2000–2013, the study ﬁnds that liquid banks can better shield against tightening monetary policy and adjust lending rate sluggishly. In contrast, banks with larger involuntary excess reserves tend to increase lending interest rates more rapidly in response to tightening monetary policy. We conclude that unwanted liquidity may lead to risk-taking behaviours which are detrimental to ﬁnancial stability. Keywords Liquidity · Excess reserves · Interest rates · Banks · China 1 Introduction The dominant role of bank ﬁnance in an economy makes banks important ﬁnancial intermediaries in propagating monetary policy decisions to the real economy (Sanders and Kleimeier 2004). It is therefore unsurprising that a growing amount of theoreti- cal and empirical studies have focused on
Empirical Economics – Springer Journals
Published: May 29, 2018
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