Reserve Requirement Ratio and Capital Flows: A Regime-Switching DSGE Estimation for China

Ruopu Hu ()
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Ruopu Hu: Graduate School of Economics, Kobe University

No 2609, Discussion Papers from Graduate School of Economics, Kobe University

Abstract: We construct and estimate a small open economy DSGE model featuring a regime-switching reserve requirement (RR) ratio rule within a banking sector that has access to foreign assets. The model incorporates key financial characteristics of the Chinese economy and examines the implications of changes in the RR-ratio. Estimation results reveal that the RR-ratio follows a feedback rule with a regime-dependent coefficient on net foreign lending during two distinct phases between 2006 and 2017. The state-contingent rule is temporarily suspended during the Global Financial Crisis, but is reactivated in the post-crisis period amid recovered capital inflows. On the one hand, the RR-ratio has almost negligible real effects on output and inflation; but on the other hand, it proves effective as a macroprudential instrument by mitigating financial instability through a reduced risk of self-fulfilling bank runs by about 25%.

Keywords: Reserve; Requirement; Ratioï¼›; Macroprudential; Policyï¼›; Financial; Stabilityï¼›; Capital; Flowï¼›; Regime-switching; DSGE (search for similar items in EconPapers)
JEL-codes: C11 E58 F41 G18 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2025-05, Revised 2026-03
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