Reforms in China’s Monetary Policy Reforms in China’s Monetary
Structural Liquidity Deficit and the Monetary Policy
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| Structural Liquidity Deficit and the Monetary Policy
Operating Framework 12 I. Introduction The monetary policy transmission mechanism under an indirect monetary policy operating framework is as follows: the trading activity of the central bank changes its balance sheet before influencing the balance sheets of com- mercial banks, which indirectly influences the general public’s income and expenditure and ultimately achieves the monetary policy objective. In this transmission process, reserves 13 are liabilities of the central bank and assets of commercial banks, serving as a bridge connecting the central bank balance sheet and those of commercial banks. They therefore become the target of monetary policy operations by the central bank, 14 and the central bank mon- etary policy operations are directly reflected in liquidity management. To be precise, the liquidity management of the central bank refers to the central bank using a framework composed of a series of tools and rules to adjust bank reserves to an appropriate level and thereby control the price of reserves (i.e., short-term interest rates) and the ultimate monetary pol- icy objective (e.g., price stability). Poole’s (1970) famous thesis is the first to clearly differentiate the central bank liquidity management theory from macroeconomic researches, stating that liquidity management is at the end of the monetary policy implementation. The minimum assumption is that the only information channel between the macroeconomy and the liquid- ity management is the operating target of the central bank (e.g., the over- night interbank lending rate). Moreover, it is further assumed that within a very short recognizable period, the influence of macroeconomic fluctuations 42 ● Reforms in China’s Monetary Policy in the central bank’s targets may be realized only through changes in the decision-making of the central bank. In other words, during such a period, only if the central bank can adjust its target variables based on its assess- ment of the macroeconomy can the macroeconomic volatility affect such variables; otherwise, the macroeconomic volatility will not directly influence the equilibrium relationship among these variables. Studies of the central bank liquidity management conducted after that of Poole pay more attention to short-term macro-economic strategies of central banks instead of focusing more on the actual implementation of monetary policy or really addressing the core concerns of central banks. In recent years, central banks in differ- ent countries have made relatively significant progress in the study of liquid- ity management. Ulrich (2000) considers that the liquidity management includes the liquidity management environment and the monetary policy operating framework. The liquidity management environment includes three elements: a highly efficient interbank money market, the predictability of automatic factors, 15 and an inability among market participants to anticipate perfectly changes in the central bank’s operating target. The two most impor- tant factors in the monetary policy operating framework are the monetary policy instrument table and the required reserves system. The former refers to how the central bank has a sufficiently wide scope of open market operation instruments, and the latter means the required reserve ratio is sufficient to offset fluctuations in automatic factors. Literature review undertaken by Chinese scholars on the central bank liquidity management is almost nonexistent. In their opinions, the objec- tives of study on monetary policy transmission are not reserves. Thus these scholars focus on the monetary base and mainly use the money multiplier to analyze the transmission mechanism between the monetary base and the money, and ignore the supply and demand relationship of the monetary base. The monetary theory provides that: money quantity = monetary base × money multiplier. This equation is an identity, which in mathematical terms is but a definition. Therefore, this equation is actually a definition of the money multiplier. The monetary theory divides decisions on the quantity of money into the monetary base and the money multiplier in the form of an identity, the purpose of which is to illustrate that central banks’ liabilities support deposit money (the liabilities of commercial banks). Because such liabilities are the monetary base, the concepts of the monetary base and the money multiplier mainly serve to explain the basic principles underlying the central bank’s monetary management. However, from an analytical or operational perspective, dividing the quantity of money into the monetary base and the money multiplier does not constitute an effective analytical framework. Monetary Theory ● 43 (1) The monetary base is not an appropriate operational target. In prac- tice, not all liabilities of the central bank can affect money creation activi- ties of commercial banks. The creation of money by commercial banks is subject only to reserves held by commercial banks. Thus, in monetary policy operations and the achievement of targets, liquidity should be the objective of study. In addition, the monetary base, defined as the central bank’s lia- bilities, includes not only reserves but also government deposits, deposits of other institutions, central bank bonds, etc. If changes in liabilities other than reserves do not affect reserves, they will not have any influence on the cre- ation of money. Hence, changes in the monetary base are inconsistent with changes in reserves, even in opposite directions. Taking the monetary base as the object of study and the operating target will therefore lead to confusion. If we take account of this distinction and amend the definition of the mon- etary base by narrowing its scope, then the definition of the monetary base will be reduced to the concept of reserves, and the concept of the monetary base will be equivalent to that of reserves. This narrowing of the concept is thus meaningless and distorts the meaning of the monetary base as liabilities of the central bank. (2) Analyzing the monetary transmission relationship by focusing on the money multiplier is too simplified. Dividing the quantity of money into the monetary base and the money multiplier changes the target of monetary policy operations to the monetary base. Moreover, by doing so, the passively defined “money multiplier” reflects the complex transmission relationship from liabilities of the central bank to liabilities of commercial banks, which cannot reflect commercial banks’ reaction to the central bank’s monetary policy. But such reaction is the key to understanding the monetary policy transmission mechanism of the central bank. Under the monetary base— money multiplier analytical framework—researchers usually assume the money multiplier remains unchanged, which is far away from reality, or break down the money multiplier into several elements such as the cash deposit ratio, which does not encompass the willingness and behaviors of commercial banks. It is therefore static and cannot dynamically reflect the process by which the monetary policy is transmitted in the banking sys- tem. Sun Guofeng (1996) states that the monetary policy transmission of the central bank is not a simple unidirectional process and that the mutual influence of the supply and demand relationship on the monetary base and money levels must be considered, and he establishes a model by which cen- tral bank operations are transmitted to the monetary base and then to money and the real economy via the supply and demand relationship. Therefore, liquidity management means the central bank needs not only to pay atten- tion to and control the actual aggregate reserves but also to change the ratio 44 ● Reforms in China’s Monetary Policy between reserves demand and reserves supply via monetary policy operations to alter the activities of commercial banks and realize the monetary policy target. Between the two stages of monetary policy transmission (reserves and money), the variable the central bank can directly control is reserves, and the demand function for commercial bank reserves and the supply function for commercial bank money have an inverse function relationship. Therefore, the system for analyzing the demand and supply of reserves established by the liquidity management framework is a model that can be directly oper- ated and applied by the central bank, which puts the activities of commer- cial banks and the elements of money demand and supply at the forefront of reserves demand. In that case, the monetary policy transmission process in these two stages can to some extent be concentrated into a model of the reserves supply and demand relationship, which makes the analysis of mon- etary policy operations more simple and efficient. tải về 1.53 Mb. Chia sẻ với bạn bè của bạn:
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