Financial development and monetary policy transmission in a multiple-tool regime : the case of Vietnamese commercial banks

The research aims to test the impact of financial development on the bank lending channel of monetary policy transmission for the case study of an emerging market characterized by a multiple-tool regime, which has been ignored in previous studies. Given the two-step system generalized moments of method (GMM) estimation for a comprehensive sample of commercial banks covering the period of 2007-2020, findings show that the financial development weakens the bank lending channel of monetary policy transmission, indicating the accessibility of banks to financial instruments and financing sources insulating these banks from the monetary policy shocks. Furthermore, the influence of the financial market on the response of the bank loan supply to monetary policy shocks is heterogeneous for each case of bank individual characteristics. These results are consistent across the GMM options for cross-section fixed effects, a set of monetary policy instruments, an alternative proxy for the financial development and the time event such as the Vietnamese financial banking system. The study sheds light on several policy recommendations for policy-makers to navigate the bank loan supply of monetary policy pass-through considering the critical role of financial development.