The Transmission Mechanism Of China Deposit Reserve Ratio Adjustment Impact On Stock Market

In recent years, the deposit reserve ratio has become a widely used policy tool since the People's Bank of China adjusted the deposit reserve ratio frequently in recent years. From July 2006 to June 2008, the PBoC adjusted the deposit reserve ratio 18 times while adjust the interest rate 7 times consecutively. The deposit reserve ration hit the record-high 17.5% from 5%. After 2010, in order to prevent economic overheat and decrease the liquidity of money market, the PBoC increased the deposit reserve ratio consecutively and the importance of the reserve ratio is rising gradually.In 1990, China established the stock market. With the development of market economy, its influence is growing and the stock market has increasingly become an important place channelling the savings to the investment. The recent global financial crisis has a significant impact on Chinese stock market. Since China's stock market is still in the development stage, its volatility and risk is much higher than the foreign mature markets. Therefore, it is very difficult for China's stock market to play the role of the " reservoir" to cope with external shock.The deposit reserve ratio adjustment can affect the fund supply of stock market, then further affect the stock price index and trading volume. Deposit reserve rate cut will ease monetary policy and increase the money supply of stock market, resulting in the rises of stock price. Therefore, it is very significant to study whether there exists the transmission mechanism of deposit reserve ratio to the stock market.This thesis empirically utilizes the VAR model to investigate the relationship between the deposit reserve ratio and stock market variables (stock price index and stock trading volume) by using the monthly data in the period 2006-2011. The impulse response analysis and variance decomposition analysis indicates that the transmission mechanism of deposit reserve ratio to the stock market is not obvious in China.This thesis organizes into six chapters. Chapterâ… is the introduction, including research background, research significance and research methods. Chapterâ…¡, is domestic and foreign literature review. Chapterâ…¢describes the adjustment of deposit reserve ratio and the status of the stock market in recent years. Chapterâ…£investigates the transmission mechanism of deposit reserve ratio to the capital market. Chapter V is the empirical analysis based on a VAR model. Chapter VI is the conclusions and policy recommendations.The conclusion is that the transmission mechanism of reserve ratio to the stock market is not obvious in China. The policy recommendations include three aspects. First, the effectiveness of monetary policy transmission mechanism should be increased and the channel of money market and securities market should be improved. Second, the stock market needs further development. Third, the flexibility of deposit reserve ratio adjustments needs to be increased.