My study analyzes the mechanism by which monetary policy may be transmitted differentially to give heterogeneous effects on asset and goods prices under the confluence of financial liberalization. By covering the last business cycle (1986-1994) in Japan, during which the process of financial liberalization accelerated, the study analyzes linkages between liberalization and the apparently observed concentrated effects of monetary policy on stock and land prices.;Based on the institutional analysis, the study sets up a hypothesis regarding how financial liberalization shifted the bank lending portfolio, and how this shift altered the lending channel of monetary policy transmission in Japan. In the empirical parts, disaggregated variables such as manufacturing, real-estate and securities loans are used in order to examine the potential existence of a disaggregate bank lending channel, linking a measure of monetary policy to a certain type of loans and then to a particular sectoral inflation such as goods, land or stock prices. A series of Granger causality tests are performed on each potential lending channel, and their results are used in the restrictions to identify a structural VAR model that is then constructed. A measure of financial liberalization is also devised to analyze effects of liberalization on banks' lending portfolio adjustment and the role this adjustment plays in directing and differentiating monetary policy effects towards different sectors of the economy.;My results confirm important linkages between financial liberalization, reactions of financial institutions, and movements in asset prices. The causality tests, impulse responses and variance decompositions all suggest that financial liberalization and easy monetary policy generate both volume and compositional effects on bank lending. That is, while the growth rates and the shares in total lending of both real-estate and securities loans increase, those of manufacturing loan decrease in response to a liberalization or an easy monetary policy shock. This in turn results in the magnification of policy effects on land and stock prices. The implication is that during the process of "Big Bang", the financial institutions behavior will continue to impact the directions and magnitudes of monetary policy effects that are transmitted towards various sectors of the Japanese economy.
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