The Call Market and the Money Supply Process in Japan

Abstract In this paper we explore the role of the call market in the transmission process of monetary policy. We formalize a model of banks' behaviour under quantitative constraints which characterize the modus operandi of monetary management in postwar Japan. The central role is assigned to the call market in explaining the supply process of money. The effectiveness of the constraints on banks' behaviour is examined by employing the comparative static analysis; it is shown that the ceiling imposed on borrowing from the central bank exerts strong influence on the call rate, and accordingly on bank credit supply, while the limit on city banks' lending tends to lower the call rate, thus attenuating the restrictive impact on credit supply of the banking sector as a whole. The evidence provided by the econometric analysis underpins the theoretical considerations derived from the model.