China’s consumer credit sector expansion and monetary transmission mechanism: What should China’s central bank do?

In this paper, we argue that as China’s consumer credit sector is expanding, the central bank’s role in smoothing economic fluctuation and promoting economic growth becomes more important. We build a general equilibrium model with durable and nondurable goods to analyze how the consumer credit sector affects the transmission mechanism of monetary policy. The model finds that an expanding consumer credit sector improves the efficiency of the monetary transmission mechanism. Two policy implications derived suggest China’s central bank should encourage the development of the consumer credit sector and liberalize market-based monetary policy tools such as interest rate tools. Her fields of interest are international economics, monetary policies and economic growth. Guofeng Sun is the deputy director of open market operation office of monetary policy department at People’s Bank of China. His research focus is the transmission mechanism of monetary policy. The authors thank two anonymous referees for their helpful comments and suggestions. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the People’s Bank of China.