Research on the Resource Allocation Effects of Monetary Policy

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This research aims at revealing how monetary policy affects resource allocations through banks' behavior. First, we analyze the differences of the banks' responses to the change in monetary policy according to their balance sheets. Using the Japanese banks' balance sheet data during 1975 through 1999, we found that those banks that were small, that had a small amount of liquid assets, and that had low capital ratio had responded to a greater extent the changes in call rates. Among the major banks, the differences of liquid assets and BIS ratios were particularly significant. Among the regional banks, the differences of accounting capital ratios and non-performing loans were particularly significant. The differences of capital ratios were important for the loans to manufacturing industries but not for the real estate industries. Our results prove the existence of lending channel of monetary policy, suggesting that the effectiveness of monetary policy is attenuated when the banks capital ratio is hit by an exogenous shock. They also reveal the importance of the resource allocation effects of monetary policy.