Analysis of the Effects of Frequent Increases of the Reserve Requirement Ratio by the People’s Bank of China


The legal required reserves system is a monetary policy that is used by central banks to perform macroeconomic adjustments. In China, the required reserves system is one of the most important policies of the People’s Bank of China. In this study, using information from the Vector Auto-Regression Model and utilizing monthly data of the reserve requirement ratio (RRR), money supply, Consumer Price Index (CPI), and loan scale from January 2006 to March 2011, we quantitatively studied the effects of frequent increases in the RRR in China. We found that China’s monetary policy regarding required reserves has not had a significant effect on dealing with excess liquidity, preventing inflation or controlling increases in the loan scale. We briefly analyzed the reasons for the limited actual effects of China’s required reserves policy regarding the required reserves system, monetary transmission mechanism, system of forced Ren Min Bi sale, and purchase of foreign exchange.

Share and Cite:

Pan, H. , Song, H. , Wang, Y. and Hu, Y. (2012) Analysis of the Effects of Frequent Increases of the Reserve Requirement Ratio by the People’s Bank of China. Modern Economy, 3, 229-236. doi: 10.4236/me.2012.32032.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] H. O. Hu and B. Ji, “Dissimilation of Reserve Fund System Functions and Development Direction of China’s Reserve Fund Policy,” Finance & Economics, Vol. 33, No. 3, 2007, PP. 1-8.
[2] T. F. Richard and J. K. Kenneth, “A Note on Reserve Requirements and Monetary Control with a Flexible Deposit Rate,” Journal of Banking & Finance, Vol. 7, No. 1, 1983, pp. 101-109. doi:10.1016/0378-4266(83)90058-4
[3] S. E. Weiner, “The Changing Role of Reserve Requirements in Monetary Policy,” Economic Review—Federal Reserve Bank of Kansas City, Vol. 77, No. 4, 1992, pp. 45-63.
[4] B. S. Bernanke and H. Mihov, “Measure of Monetary Policy,” The Quarterly Journal of Economics, Vol. 113, No. 3, 1998, pp. 869-902. doi:10.1162/003355398555775
[5] E. M. Leeper, C. A. Sims and T. Zha, “What Does Monetary Do?” Brooking Paper on Economic Activity, 1996, pp. 1-63.
[6] H. S. Gordon and E. W. Stuart, “Monetary Policy without Reserve Requirements: Case Studies and Options for the United States,” Economic Review—Federal Reserve Bank of Kansas City Kansas City, Vol. 82, No. 2, 1997, pp. 25-26.
[7] D. H. James, “The Supply and Demand for Federal Reserve Deposits,” Carnegie-Rochester Conference Series on Public Policy, Vol. 49, No. 4, 1998, pp. 1-44.
[8] M. Goodfriend, “Interest on Reserves and Monetary Policy,” FRBNY Economic Policy Review, Vol. 19, No. 3, 2002, pp. 33-45.
[9] J. Tobin and W. C. Brainard, “Financial Intermediaries and the Effectiveness of Monetary Controls,” American Economic Review, Papers and Proceedings of Seventy- Five Annual Meeting of the American Economic Association, 1963, pp. 53.
[10] B. C. Shi, “Required Reserves Policy and Money Supply,” Shanghai Finance, Vol. 29, No. 5, 2008, pp. 43-45.
[11] Z. F. Luo, “Operation of Required Reserves Policy of People’s Bank of China and Analysis of Effects,” Reform of the Economic System, Vol. 28, No. 6, 2010, pp. 96-100.
[12] L. H. Wu, “Effectiveness Evaluation of Constant RRR Increase in China,” Journal of Shanghai Finance University, Vol. 17, No. 4, 2010, PP. 23-29.
[13] F. B. Zhao and J. Y. Zhao, “Analysis of Macroscopic Effect of RRR Increase of People’s Bank of China,” Journal of Shanghai Business School, Vol. 9, No. 1, 2008, PP. 1-8.
[14] Z. Li, “Analysis of China’s RRR Adjustment and Existing Problems,” Journal of Beijing Technology and Business University, Vol. 28, No. 5, 2008, pp. 92-97.
[15] G. G. Yang, “Analysis of Influencing Factors of China’s RRR Policy Effect,” Economic Perspectives, Vol. 15, No. 4, 2008, pp. 53-58.
[16] J. Cui and X. Liu, ‘‘Mechanism of Action and Effectiveness of China’s Required Reserves System,” Statistics and Decision-making, Vol. 29, No. 6, 2009, PP. 122-124.
[17] The People’s Bank of China, 2011.
[18] The National Bureau of Statistics, 2011.
[19] X. T. Zhang, “User Guide of Eviews and Cases,” China Machine Press, Beijing, 2008.
[20] Z. Zhao, “Why the Effect of Frequent Application of Required Reserves Tool by People’s Bank of China Recently Is Not Obvious?” Finance & Economics, Vol. 33, No. 9, 2007, pp. 8-14.

Copyright © 2024 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.