Effect of Financial Development on the Transmission of Monetary Policy
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Date
2017-06
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Scientific Research
Abstract
This paper looks at the effect of financial development on output and bank
liquidity by doing a cross-country analysis of 119 countries across 18 years
from 1997-2014. We develop three hypotheses by combining multiple strands
of literature which have heretofore existed in parallel. The main research
question is whether financial development serves to provide greater bank liquidity
and whether it does indeed stimulate output growth. This question is
of particular relevance when there are changes in monetary policy. This paper
goes to the heart of examining whether monetary policy is transmitted more
effectively with better financial development and whether the goal to achieve
output changes via monetary policy is better effected in an environment of
developed financial markets. Our results support the hypotheses that financial
development positively impacts output, and negatively affects bank liquidity.
We also show that with financial development, the effect of bank liquidity on
output is heightened.
Description
Keywords
Monetary Policy, Financial Development, Money Supply, Bank Liquidity, Output
Citation
Theoretical Economics Letters, 2017, 7, 795-813