Title: The bank liquidity creation channel of monetary policy transmission in a multiple-instrument environment

Authors: Van Dan Dang

Addresses: Department of Finance, Banking University of Ho Chi Minh City, Ho Chi Minh City 700000, Vietnam

Abstract: The study investigates the impact of monetary policy on bank liquidity creation, a much broader concept than bank lending. Using the annual financial data of Vietnamese commercial banks from 2008 to 2018, we show that an expansionary (contractionary) monetary policy tends to increase (decrease) bank liquidity creation. Our further analysis through monetary policy indicators ranging from lending rates to primary policy instruments, including policy rates and open market operations, provides strong evidence favouring the bank liquidity creation channel. Slightly differently, we do not have much confidence in the case of the foreign exchange reserves. Besides, we also confirm the existence of the bank lending channel, which differs from the bank liquidity creation channel in terms of the magnitude of transmission, from the perspective of a multiple monetary-policy-instrument environment.

Keywords: bank lending channel; emerging market; liquidity creation; monetary policy; interest rates; money injection.

DOI: 10.1504/IJMEF.2022.121566

International Journal of Monetary Economics and Finance, 2022 Vol.15 No.1, pp.58 - 77

Received: 25 Dec 2020
Accepted: 29 Jul 2021
Published online: 18 Mar 2022 *

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