In Korea, the rapid growth of liabilities of non-bank financial institutions in recent decades has stimulated the necessity of study concerning the substitutability of such liabilities for money. The reason for this necessity is that the degree of substitutability between the two will have an important impact upon the financial aspects of long-run economic development as well as significant implications for monetary theory and policy.
The purpose of this study is to investigate the influences of non-bank financial institution on the traditional monetary policy. The important question raised by the Gurley - Shaw thesis is whether the liabilities of financial intermediaries are such close substitutions for bank deposits of other financial claims backed by only a small fractional reserve of money -- in short, whether financial intermediaries substantially increase the interest-elasticity of demand for money.
In this respect, regression analysis is implemented to test the Substitution Hypothesis using quarterly time-series data from 1965 to 1984 for Korean financial market.
The main result is that the Gurley-Shaw hypothesis is weakly supported, even if the degree of substitutability between liabilities of non-bank financial institution and money is appeared very large. And so it doesn't seems that the rapid growth of non-bank financial institutions has serious influences on monetary policy.
But, because monetary policy is influenced by non-bank financial institutions and the trend of financial deepening is incresing, it must be considered that financial control, as the successor to monetary control, would regulate creation of financial assets in all forms that are competitive with direct securities in spending units' portfolios.