Monetary Policy and Deleveraging of Microfinance Institutions in China: A Dynamic Threshold Approach

Abstract

By constructing the dynamic panel model and dynamic threshold model, this paper empirically analyzes the direct impact of monetary policy transmission on deleveraging initiatives of 204 microfinance institutions (MFIs) in China from 2012 to 2021, and the interactive effects of different monetary policy tools. The empirical investigations find that: the quantitative monetary policy transmission directs a negative impact on MFIs' deleveraging, while the direct macro-control of price-based monetary policy tool is not significant. When two monetary policy tools interact, the inhibitory effect of quantitative monetary policy on MFIs' deleveraging weakens once the price-based monetary policy tightening exceeds the threshold. Additionally, as the endogenous money multiplier amplifies the actual money quantity, price-based monetary policy starts to play its role in stable controllability, and MFIs gradually accept market-oriented interest rate mechanisms to adjust their deleveraging initiatives. The findings herein contribute to the significant implications of the study. The central bank should characterize the quantity control of quantitative monetary policy and the structural control of price-based monetary policy to formulate a scientific monetary policy. By improving the market-oriented interest rate mechanism of microfinance and coordinating with macroprudential regulations, it could achieve micro-prudential guidance on MFIs' deleveraging progress, as well accelerate economic transition and structural leverage adjustment.