An Analysis On The Application Of The Legal Deposit Reserve Policy And Its Effect In China

Legal Deposit Reserve (LDR), rediscount and open market operations are the three magic weapons of a national monetary policy. Through the multiplier effect of money, LDR policy’s effect which influences national economy is easy to be magnified. Therefore, under normal circumstances, the LDR policy is not a common monetary policy tool used by national central bank. However, the LDR policy, regarded as the "axe","strong medicine", was used by the People’s Bank frequently in China. From the beginning of2006, China was faced with excess liquidity, bank credit expansion, inflation in the economic situation, the People’s Bank began to adjust legal deposit reserve ratio frequently (by the end of May2012, has accumulated to35times) to control the domestic economic situation. On the contrary, in developed countries, the frequency of LDR ratio adjustment was reduced gradually; some countries even abandon the use of LDR policy. In academia, there was a huge controversy on this issue. Therefore, at this stage, exploring the application of the LDR policy research and policy’s effects will help people understand the necessity of the existence of LDR policy, and improve the effectiveness of the policy eventually.Based on former study on the LDR policy, author conducted an empirical research on China’s LDR policy’s effects, using a combination of qualitative analysis and quantitative analysis, a combination of theoretical analysis and application analysis. In order to achieve the purpose of in-depth study, this research will be divided into five parts:The first chapter is introduction. Providesan introduction to the issues covered in the thesis, the problem formulation and research question. In recent years, faced with the complicated economic situation, the People’s Bank of China adjust the LDR ratio frequently. Although developed countries seldom use the tool, from a practical point of view of our country, the tool is suitable for China’s economic conditions. From the view of the theoretical significance, this research will improve the effectiveness of LDR policy. From the view of the actual significance, this research provides a reference for policy makers, leading to flexible application of the LDR policy. The literature report in this chapter presents an overview of the research on the LDR policy and its effects.The second chapter is a theoretical overview of the legal deposit reserve policy. It introduces respectively the connotation and mechanism of the origin and content of the legal deposit reserve system. On this basis, this chapter discusses the advantages and disadvantages of the legal deposit reserve policy.In chapter3, firstly the previous adjustments of China’s LDR ratio are introduced. In the process of adjustment, depending on the regulatory approach applied in the adjustment process, the analysis is divided into two major periods. Secondly, this study focuses on the reasons of these adjustments. It results from the complication in our country, the large amount of financial institutions in China. Besides, the policy of LDR has a significant effect to the banking, the real-estate market and stock market, thus, the people’s bank of China has to use this Monetary Policy rather frequently.In chapter4, the analysis of the effect of the legal deposit reserve policy after2006. First of all, in this chapter, the adjustments of the legal deposit reserve ratio in all stages of our country have been analyzed by using the detailed qualitative analysis. In order to study the effects of China’s legal deposit reserve policy more clearly, this chapter selects the monthly data for the period2006to May2012, using empirical research and analysis. The effectiveness of monetary policy is apparent through the intermediary indicators pass effect and the ultimate goal of achieving results. Through the analysis of the measurement of four variables RD, M2, CPI and GDP, we can draw a conclusion that M2, CPI and GDP have the cointegration relationship. It improves M2can be the suitability of our national monetary policy intermediary indicator in short run. The adjustment of the legal deposit reserve ratio can affect the supply of M2. In the long term, the center bank uses CPI and GDP to measure the effectiveness of the legal deposit reserve policy. In VAR model and differential analysis, there is a negative effect between the legal deposit reserve ratio and the amount of money supply in the short term. But in about a year, the effect will be converted into a positive correlation effect. The positive effect of the legal deposit reserve ratio and CPI, GDP also verified the analysis of the legal deposit reserve policy experience. Therefore in the short term, China’s People’s Bank has to adjust the legal deposit reserve ratio frequently to adjust our economy.In chapter5, to make a few effective ways to enhance China’s legal deposit reserve policy effect. Based on the empirical analysis of the last chapter, elaborates the inefficient reasons of China’s legal deposit reserve policy, and puts forward several effective ways to improve China’s legal deposit reserve policy effect.