Monetary
Theory
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55
a stable liquidity management framework. Historically, developed countries
have mainly lowered the required reserve ratio to reduce the cost burden
for commercial banks provided liquidity management could be safeguarded.
Furthermore, in comparing assets-side bond purchase
operations with the
liabilities-side operation of lowering the required reserve ratio, the central
bank is clearly inclined to expand the scale of its assets. This is mainly because
the size of the country’s economy and financial
assets increase continuously,
for which the central bank needs to increase its assets to ensure the central
banks’ assets accounting for an appropriate proportion of the country’s total
financial assets; otherwise, the central bank’s influence
in the economic and
financial system might be weakened. The structural liquidity deficit created
by the required reserve ratio enables the central bank to purchase bonds and
increase its assets. Through the required reserve ratio,
the increase of the cen-
tral bank’s assets has an approximate quantitative proportional relationship
with the increase of deposits and loans in commercial banks.
Contrary to the common understanding, to increase the same amount
of
excess reserves, the influence exerted by adjusting the required reserve
ratio is weaker than that of the central bank bond purchases. Lowering the
required deposit reserves ratio produces positive buffer stock reserves, and
from
the market perspective, funding has increased. In addition, the central
bank bond purchases reduce the amount of bonds circulating in the market
when market funding increases and accelerate changes
in the bond-to-funds
ratio in the market. If the central bank purchases 100 billion yuan bonds, the
influence of such purchase on the market interest rate is greater than that of
lowering the required reserve ratio to release 100 billion yuan reserves. Due to
their
underdeveloped bond markets, central banks of some developing coun-
tries and emerging countries prefer to use the required reserve ratio; however,
the effect is usually not good. Monetary policy operations under an indirect
monetary policy operating framework influence structural adjustments to the
funds and liabilities of commercial banks mainly
through the interest rate
channel, thus affecting the quantity of money. Therefore, from the interest
rate perspective, the central bank is inclined to choose assets-side trading.
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