AFRE and Monetary Policy Transmission

A new concept was introduced into macro - economic management in China this year,which is Aggregate Financing to the Real Economy(AFRE).AFRE describes the total financing from the financial system to the real economy during a certain period.It is an aggregated indicator comprehensively depicting the financial support from the financial sector to the real economy,as well as the interaction between the financial sector and the real economy.AFRE collects information from the asset side of financial institutions' balance sheet,and this is different from money supply,which is a traditional indicator with information from the liability side.Theoretical support for AFRE comes from the credit view of monetary policy transmission mechanism.The introduction of AFRE is deeply rooted in developments of the Chinese economic and financial environment,including the ongoing innovations in financial markets and products,rapid expansion in direct financing,the enhanced role played by non - bank financial institutions and the increase in off - balance - sheet items in commercial banks. Empirical study using Chinese data also indicates that monetary policy can affect and manage AFRE effectively, and AFRE,in turn,can influence real economic indicators,such as economic growth,price level,as well as investment and consumption.AFRE is a useful indicator revealing the interaction between the financial sector and the real economy,and it helps to strengthen the link between both sides.