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Reserve Requirement Policy, Bond Market, and Transmission Effect

Author

Listed:
  • Li Ma

    (Department of Finance, Wuhan University, Wuhan, China)

  • Tsangyao Chang

    (Department of Finance, Feng Chia University, Taichung, Taiwan.)

  • Chien-Chiang Lee

    (Department of Finance, National Sun Yat-sen University, Kaohsiung, Taiwan. Corresponding author.)

Abstract

The adjustment of the reserve requirement ratio is one of the most frequently used monetary policy instruments employed by monetary authorities in emerging market economies. According to monetary theories, it was primarily designed to influence the monetary multiplier. However, both academics and practitioners have long questioned whether such a requirement has an impact on commercial bank bond holdings and the output of real economy through price fluctuations in the bond market. In this paper, we set up a macroeconomic equilibrium model that includes central banks, commercial banks, and enterprises, covering a wide range of credit markets, bond markets, and commodity markets. In order to explore the transmission effect of the reserve requirement ratio policy through the bond market, we introduced the method of limit solutions using non-homogeneous linear differential equations with constant coefficients. We empirically examine the existence and effectiveness of transmission mechanisms by applying the TRAMO technique and a cointegration test based on large- sample data from China. The results show that the adjustment of the reserve requirement ratio affects the asset structure of commercial banks, bond market prices, and ultimately the real economy.

Suggested Citation

  • Li Ma & Tsangyao Chang & Chien-Chiang Lee, 2016. "Reserve Requirement Policy, Bond Market, and Transmission Effect," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 66-85, June.
    • Handle: RePEc:rjr:romjef:v::y:2016:i:2:p:66-85
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    References listed on IDEAS

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    Cited by:

    1. Yang-Chao Wang & Jui-Jung Tsai & Lanxin Lu, 2019. "The impact of Chinese monetary policy on co-movements between money and capital markets," Applied Economics, Taylor & Francis Journals, vol. 51(45), pages 4939-4955, September.

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    More about this item

    Keywords

    reserve requirement ratio; bond market; transmission effect; monetary policy;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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