the central bank. Based on the above simple model, we try to answer our research questions one by one It can be proved that, under this scenario the equilibrium loan rate and loan size can be written as follows(proofs can be found in Appendix a): AD+N N+8 L-N(AD-A'2 (5) Where AD is aggregate demand for loans in the economy, S, is managing cost in the banking sector and a, is firms'price sensitivity for banking loans. From the above two equations, we can see that four factors could affect loan rate and loan size: r,(the market interest rate in free capital market), AD, 8 and A. Interestingly, changes of monetary policy instruments such as benchmark deposit rate or rrr do not enter loan equations directly, however, they could affect loan pricing and loan size indirectly since monetary policy changes will affect the market interest rate(Proofs can be found in Appendix A) Theoretical predictions When the deposit rate ceiling is binding and lending rate floor is not binding, loan rate increases with the market interest rate, while loan quantity decreases with the market interest rate. Monetary policy instruments can also affect bank lending through th market interest rate: loan rate increases with the benchmark deposit rate and RRR, while the loan quantity decreases when the Pbc raises the benchmark deposit rate and rRR 4. Empirical Analysis 4.1 Empirical Specification The goal of empirical models is to test the theoretical predictions and the theoretical model provides a good guideline for empirical specification. However the reality is much more complicated than that in the simple model. First, we need to identify the most likely scenario in the real world: the deposit rate ceiling is binding while the lending rate floor is not binding. Even though the credit quota may be imposed on the banking sector when necessary, it is generally believed that the PbC tends to use it as little as possible, especially in recent years. Therefore, our empirical models are based on the simple scenario without credit quota, although the potential impact of credit quota will be discussed in the caveat. Now we discuss empirical factors impacting bank lending one by a) Policy instruments and the market interest rate The first theoretical prediction illustrates that when the deposit rate ceiling is binding and lending rate floor is not binding, loan rate increases with the market interest rate in the8 the central bank. Based on the above simple model, we try to answer our research questions one by one. It can be proved that, under this scenario the equilibrium loan rate and loan size can be written as follows (proofs can be found in Appendix A): L l L nr l N AD Nr r δ λ δ + + = * (4) L l l nr N N AD r L δ λ λ + − = ( ) * (5) Where AD is aggregate demand for loans in the economy, L δ is managing cost in the banking sector and λl is firms’ price sensitivity for banking loans. From the above two equations, we can see that four factors could affect loan rate and loan size: nr r (the market interest rate in free capital market), AD , L δ and λl . Interestingly, changes of monetary policy instruments such as benchmark deposit rate or RRR do not enter loan equations directly, however, they could affect loan pricing and loan size indirectly since monetary policy changes will affect the market interest rate (Proofs can be found in Appendix A). Theoretical predictions When the deposit rate ceiling is binding and lending rate floor is not binding, loan rate increases with the market interest rate, while loan quantity decreases with the market interest rate. Monetary policy instruments can also affect bank lending through the market interest rate: loan rate increases with the benchmark deposit rate and RRR, while the loan quantity decreases when the PBC raises the benchmark deposit rate and RRR. 4. Empirical Analysis 4.1 Empirical Specification The goal of empirical models is to test the theoretical predictions and the theoretical model provides a good guideline for empirical specification. However the reality is much more complicated than that in the simple model. First, we need to identify the most likely scenario in the real world: the deposit rate ceiling is binding while the lending rate floor is not binding. Even though the credit quota may be imposed on the banking sector when necessary, it is generally believed that the PBC tends to use it as little as possible, especially in recent years. Therefore, our empirical models are based on the simple scenario without credit quota, although the potential impact of credit quota will be discussed in the caveat. Now we discuss empirical factors impacting bank lending one by one. a). Policy instruments and the market interest rate The first theoretical prediction illustrates that when the deposit rate ceiling is binding and lending rate floor is not binding, loan rate increases with the market interest rate in the