Study On The Relationship Between Pboc’s Financial Strength And Monetary Policy Effectiveness

In the past several decades, the economic study on central banks mostly focused on how to make optimal monetary policy targets and how to make monetary policy transfer more effectively. These studies treat central banks as government institutions, without considering about the cost and benefit of conducting monetary policy. However, from the 1980 s to the 1990 s, the central banks of Venezuela, Jamaica and some other countries experienced certain financial crisis, which caused the attention from academic field and the public on financial health condition of central banks. Nowadays, China’s central bank shows some similarities with those central banks in financial crisis, such as asset depreciation, increasing cost of writing-off, low capital adequacy and so on. These phenomena cause our attention on the financial strength of the central banks in China. After studying on the disclosed financial reports by People’s Bank of China(PBOC in short) and related laws and rules, we find that there is comparatively large gap between the accounting rules adapted in China and general accounting rules used internationally. Therefore, we cannot deduce the financial condition of PBOC only according the disclosed financial data. Instead, more realistic financial strength will be shown after sorting and revaluation of financial data of PBOC.This article carefully estimates the revenue and cost of PBOC from 2002Q1 to 2014Q4, based on knowledge about the source and meaning of every item in the balance sheet, meanwhile using the data of interest rate and foreign exchange rate. This process generates the data of net profit and equity, which can more accurately reflect PBOC’s financial strength. The result shows that in the last decade, PBOC’s financial strength was in the trend of deteriorating, mainly due to the foreign reserve depreciation. In the part of empirical study, we establish an index—MPC based on Taylor’s rules to measure the extent of monetary policy constraint. We use the Cointegration Test to test the long-term relationship between MPC and the capital adequacy ratio of PBOB and then use the Granger Causality Test to test their causality relationship. The results show that there is negative cointegration relationship between MPC and the capital adequacy ratio, and the capital adequacy ratio is the Granger cause of MPC. The empirical result implies that in the long term, decreasing central bank capital adequacy will have negative influence on the effectiveness of monetary policy. Therefore, properly increasing capital adequacy will help PBOC more effectively reach the monetary policy goals.