Many long-held views about the global financial system and the effectiveness of monetary policy have been questioned since the Global Financial Crisis (GFC) of 2007/2009. At stake is the capacity of monetary authorities to isolate international monetary policy shocks under financial globalization coupled with the rapid development of shadow banking and its impact on the banking system and monetary policy transmission. This thesis comprises three empirical studies to examine these issues by providing evidence from China. The first study investigates the international transmission of monetary policy from the U.S. to China. The results show that the spillover effects of U.S. monetary policy are significant and strong on China's short-term interest rates after the GFC. The spillover at the long-end of the yield curve even holds before the GFC, but only for positive changes in U.S. long-term interest rates. By comparing the results with countries under flexible exchange rates such as New Zealand, I find a fixed exchange rate regime with capital controls helps to mitigate more effectively external monetary shocks especially during a turmoil period. The second study shifts the focus on the driving forces of the rise of shadow banking in China. Aside from micro arbitrage factors suggested by previous literature, I paid specific attention to a wide range of macro-finance factors. To reflect the unique institutional features that shape macroeconomic policy making in China, I introduce a novel identification strategy to isolate pure monetary policy shocks from the influence of other macroeconomic policy variations. The empirical results show robustly that China's shadow banking is essentially driven by macro-policy factors including credit scale tightening, strengthened risky-loan regulation, and intensified interest-rate repression. In contrast, the effect of a pure monetary contraction is to reduce shadow banking, due to an economy-wide tightening of liquidity. The third essay investigates how shadow banking impacts loan pricing and the pass-through from policy rates to retail lending rates. The results show that the yield of shadow banking products impacts the lending rates positively, in which 20 percent of the impact takes effect through the deposit channel. The scale of shadow banking wealth management products (WMPs) does not significantly impact lending rates. Furthermore, the rise in shadow banking appears to have decreased the pass-through from benchmark policy rates to lending rates after 2013 by providing alternative credit options to bank loans, supporting the loan-demand side view. On the other hand, I find the effect of shadow banking on the pass-through from market-based short-term policy rates to lending rates became insignificant after 2013 as the arbitrage model shifted from the WMP-channel-shadow credit to interbank-entrustment-securities. However, China's shadow banking appears to have significantly decreased net interest margins of banks after 2013 as the average return on financial securities invested by shadow banking is lower than on-balance loan yields.

An authoritative guide to the rise of Chinese shadow banking and its systemic implications Shadow Banking in China examines this rapidly growing sector in the Chinese economy, and what it means for your investments. Written by two world-class experts in Chinese banking, including the Chief Advisor to the China Banking Regulatory Commission and former Chairman of the Securities and Futures Commission in Hong Kong, this book is unique in providing true, first-hand perspectives from authorities within the world's largest economy. There is little widely-available information on China's shadow banking developments, and much of it is rife with disparate data, inaccuracies and overblown risks due to definitional and measurement differences. This book clears the confusion by supplying accurate information, on-the-ground context and invaluable national balance sheet analysis you won't find anywhere else. Shadow banking has grown to be a key source of credit in China, and a major component of the economy. This book serves as a primer for analysts and investors seeking real, useful information about the sector to better inform investment decisions. Discover what's driving the growth of shadow banking in China Learn the truth about both real and inflated risks Dig into popular rhetoric and clarify common misconceptions Access valuable data previously not published in English Despite shadow banking's critical influence on the Chinese economy, there have been very few official studies and even fewer books written on the subject. Understanding China's present-day economy and forecasting its future requires an in-depth understanding of shadow banking and its inter-relationship with the banking system and other sectors. Shadow Banking in China provides authoritative reference that will prove valuable to anyone with financial interests in China.

Central banks in emerging and developing economies (EMDEs) have been modernizing their monetary policy frameworks, often moving toward inflation targeting (IT). However, questions regarding the strength of monetary policy transmission from interest rates to inflation and output have often stalled progress. We conduct a novel empirical analysis using Jordà’s (2005) approach for 40 EMDEs to shed a light on monetary transmission in these countries. We find that interest rate hikes reduce output growth and inflation, once we explicitly account for the behavior of the exchange rate. Having a modern monetary policy framework—adopting IT and independent and transparent central banks—matters more for monetary transmission than financial development.

This paper focuses on negative interest rate policies and covers a broad range of its effects, with a detailed discussion of findings in the academic literature and of broader country experiences.

This book collects selected articles addressing several currently debated issues in the field of international macroeconomics. They focus on the role of the central banks in the debate on how to come to terms with the long-term decline in productivity growth, insufficient aggregate demand, high economic uncertainty and growing inequalities following the global financial crisis. Central banks are of considerable importance in this debate since understanding the sluggishness of the recovery process as well as its implications for the natural interest rate are key to assessing output gaps and the monetary policy stance. The authors argue that a more dynamic domestic and external aggregate demand helps to raise the inflation rate, easing the constraint deriving from the zero lower bound and allowing monetary policy to depart from its current ultra-accommodative position. Beyond macroeconomic factors, the book also discusses a supportive financial environment as a precondition for the rebound of global economic activity, stressing that understanding capital flows is a prerequisite for economic-policy decisions.

We present a model in which shadow banking arises endogenously and undermines market discipline on traditional banks. Depositors' ability to re-optimize in response to crises imposes market discipline on traditional banks: these banks optimally commit to a safe portfolio strategy to prevent early withdrawals. With costly commitment, shadow banking emerges as an alternative banking strategy that combines high risk-taking with early liquidation in times of crisis. We bring the model to bear on the 2008 financial crisis in the United States, during which shadow banks experienced a sudden dry-up of funding and liquidated their assets. We derive an equilibrium in which the shadow banking sector expands to a size where its liquidation causes a fire-sale and exposes traditional banks to liquidity risk. Higher deposit rates in compensation for liquidity risk also weaken threats of early withdrawal and traditional banks pursue risky portfolios that may leave them in default. Policy interventions aimed at making traditional banks safer such as liquidity support, bank regulation and deposit insurance fuel further expansion of shadow banking but have a net positive impact on financial stability. Financial stability can also be achieved with a tax on shadow bank profits.

The global economy has experienced four waves of rapid debt accumulation over the past 50 years. The first three debt waves ended with financial crises in many emerging market and developing economies. During the current wave, which started in 2010, the increase in debt in these economies has already been larger, faster, and broader-based than in the previous three waves. Current low interest rates mitigate some of the risks associated with high debt. However, emerging market and developing economies are also confronted by weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood that the current debt wave will end in crisis and, if crises do take place, will alleviate their impact.