Transmission I: Inside the Banking Black Box

This is the first of a pair of chapters opening the ‘black box’ of the banking system to understand the transmission mechanism through which the People’s Bank of China tried to influence its money and credit intermediate target variables. Here we discuss two unsatisfactory visions of the process: the simple bank money multiplier approach, and the ‘industrial organisation’ framework treating banks as intermediaries of ‘funds’ between depositors and borrowers. Chinese policymakers rejected both of these ways of looking at policy transmission through banks.