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Reserve requirements and optimal Chinese stabilization policy

Author

Listed:
  • Chang, Chun
  • Liu, Zheng
  • Spiegel, Mark M.
  • Zhang, Jingyi

Abstract

China’s central bank frequently adjusts reserve requirements for macroeconomic stabilization. We evaluate the effectiveness of such policy in a two-sector DSGE model. A heavy-industry sector—proxied as state-owned enterprises (SOEs)—is financed through government-guaranteed bank loans subject to reserve requirements, while more productive private firms rely on unregulated off-balance sheet financing. Increasing reserve requirements reallocates resources towards private firms, raising both aggregate productivity and SOE bankruptcies. Optimal reserve requirement adjustments complement money supply adjustments in improving macroeconomic stability and welfare. However, gains are greater under sector-specific shocks, which call for resource reallocation, than under aggregate shocks.

Suggested Citation

  • Chang, Chun & Liu, Zheng & Spiegel, Mark M. & Zhang, Jingyi, 2019. "Reserve requirements and optimal Chinese stabilization policy," Journal of Monetary Economics, Elsevier, vol. 103(C), pages 33-51.
    • Handle: RePEc:eee:moneco:v:103:y:2019:i:c:p:33-51
    DOI: 10.1016/j.jmoneco.2018.08.005
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    More about this item

    Keywords

    Reserve requirements; Chinese monetary policy; Off-balance sheet loans; Financial accelerator; Reallocation and productivity;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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