Today, I attended a lecture by Prof. Bernard Yeung on State-owned banks and the efficacy of monetary policy. You can read a draft version of their (Yeung and his collaborators) here but in short, they continue exploring whether the findings from a previous paper on China translates into a more generalised case.

The earlier finding was that monetary policy only seems to be (more) effective in countries where state-owned banks effectively do the bidding of the central bank by lending in times where privately owned banks tend to be more cautious.

This paper of theirs shows that their finding in the China case can indeed be generalised across countries (their sample is 44 countries). Of course, Prof. Yeung made the point that while their work only looks at the effectiveness of monetary policy in the short-run and it is pretty clear that while monetary policy works better when banks play their role in the transmission of the policy (hence the efficacy of state-owned banks), this leads to misallocation of resources in the long-run. Case in point, once again, being the state of China’s economy now as a result of their monetary policy carried out in 2010/11.

I won’t go into the details of the bases they cover to shoot down alternative explanations as that involves some statistical technicalities which I’m not familiar with but it seems that he has a pretty solid argument. The implications I’m thinking of are more interesting; namely:

  • Monetary policy is ineffective for most free markets without fiscal policy pulling their weight (think US, Eurozone and Japan right now)
  • Asset bubbles will most certainly develop (and subsequently deflate) in countries with huge state-owned banks that bring out the bazooka.

Fits pretty much into whatever the mainstream economic community is thinking of right now.