TITLE:
Effect of Financial Development on the Transmission of Monetary Policy
AUTHORS:
Rama Seth, Vaanchitha Kalyanaraman
KEYWORDS:
Monetary Policy, Financial Development, Money Supply, Bank Liquidity, Output
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.4,
June
14,
2017
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.