Reforms in China’s Monetary Policy Reforms in China’s Monetary
(b) The Concept of “Required Reserves”
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| (b) The Concept of “Required Reserves”
The conventional money theory defines the “required reserves” as a por- tion of deposits that has been held by the Federal Reserve System (Mishkin, 1995). “The bank has to retain a certain amount of the absorbed deposits to ensure depositors may withdraw their money at any time, and the remaining deposits can be used for lending and investment” (Li, 1999). “The United States has a fractional reserve system, namely, banks are required to save or ‘reserve’ part of the funds deposited by depositors in a form approved by the Fed. As a result, banks will only be able to lend part of their absorbed deposits to borrowers” (Fabozzi, 1998). Deposits are liabilities to banks, whereas reserves are assets to bank. Thus banks cannot increase their assets by reducing their liabilities. Similar with the relations between banks and the nonbank public, the status of the central bank and commercial banks are also unequal: banks’ liabilities are money, whereas the central bank’s liabilities are monetary base. Banks cannot possibly convert their own liabilities into their own assets. To have a balanced balance sheet, an entity has two ways to increase their assets: one is to reduce the assets under other items, and the other is to increase liabilities. Thus banks can increase their required reserves (i.e., increase their assets) by selling assets under other items or increasing liabilities. Given that banks as a whole can only transact with the central bank and the nonbank public, the first way to increase required reserves is to sell assets to the central bank, and the second way is to seek refinancing from the central bank or to absorb cash from the nonbank public and then deposit the cash in the central bank. Banks cannot take cash from the nonbank public over a long term to lend out more money than they absorb. Nor can an individual bank on a long-term basis (although this may happen occasionally). Therefore if banks as a whole or an individual bank wants to increase the required reserves, it needs to transact with the central bank. For banks, what changes the amount of deposits is different from what changes the amount of required reserves: the former concerns transactions between banks and clients, whereas the latter concerns transactions between banks and the central bank. Thus there is only a proportional relationship between deposits and reserves; changes of deposits are separated from that 20 ● Reforms in China’s Monetary Policy of reserves. Increase in deposits requires a proportional increase in required reserves. If banks do not have enough required reserves, they need to sell their assets to or borrow money from the central bank to obtain such reserves. tải về 1.53 Mb. Chia sẻ với bạn bè của bạn:
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