ABSTRACT Traditional monetary policy transmission theory posits that policy easing enhances credit availability. However, we document a reversal‐like attenuation of this channel under net interest margin (NIM) pressure. Using data from 183 small and medium‐sized banks (SMBs) in China from 2009 to 2024, we employ high‐frequency identification and local projection to conduct empirical tests. We find that lending rates fall significantly faster than deposit rates following monetary easing, leading to a sharp rapid compression of NIMs. State‐dependent local projection results indicate that high‐NIM banks respond sluggishly to monetary policy and exhibit limited credit growth. By characterizing NIM as an intrinsic equilibrium outcome of cost rigidity and the competitive environment, we employ multiple methods to deconstruct these dual dimensions. The results are consistent with supply‐side constraints: cost rigidity emerges as the dominant factor limiting credit expansion, while the competitive environment acts as an amplifier. This paper documents the underlying conditions under which conventional monetary transmission becomes attenuated and state‐dependent, offering important implications for economies with similar financial systems.
Qi et al. (Sun,) studied this question.
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