A Study On The Effectiveness Of China 's Deposit Reserve Policy Based On The Credit Channel Of Commercial Banks

Since its establishment in1984, the policy of deposit reserve has become one of the most important tools for the People’s Bank of China to regulate liquidity and control money supply. Since2006, the central bank has adjusted the statutory deposit reserve rate36times, the effects of which have become the focus of attention. This dissertation takes bank credit as the intermediate target in the conductive process of monetary policies and gross yield as final goal. The process of conduction has been divided into two processes, the internal part and the external part. Through the application of econometric methods such as cointegration tests and VEC model, we intend to conduct empirical analysis on the effectiveness of deposit reserve policy in both parts.In the internal conductive process, we compared the different effects on bank credit of three monetary policies including deposit reserve, open market operations and rediscount. Our empirical results have indicated the inefficiency of deposit reserve policy. On the basis of that, we have extended our model by introducing the amount of funds outstanding for foreign exchange, and we have also drawn the same conclusion. Besides, the extended model has shown that the changes of deposit reserve ratio have exerted more impact on the amount of funds outstanding for foreign exchange than on bank credit. In fact, the central bank has been burdened with the task of hedging the funds outstanding for foreign exchange for a long time.In the external conductive process, we compared the different effects of bank credit and money supply on gross yield. Although bank credit tends to have weaker influence on gross yield than money supply does, the effect itself is statistically significant.Furthermore, we try to analyze the reasons for the inefficiency of deposit reserve policies in internal conductive process with the financial data in Chinese banking industry from2006to2011. We have found that banks could choose to weaken the effects of deposit reserve policy by different means, including interbank borrowing, asset allocation and intermediary business.Finally, we have offered several suggestions to enhance the efficiency of deposit reserve policies, giving the prospects for future improvement.