Targeted reduction in reserve requirement ratio and optimal monetary policy in China

Xiaoyun Wei and Liyan Han

International Review of Economics & Finance, 2020, vol. 69, issue C, 209-230

Abstract: We investigate the effect of targeted reduction in reserve requirement ratio (RRR) on macro stability based on a two-sector DSGE model with heterogeneous capital-labor ratios. We derive the optimal monetary policy rule and compute the central bank’s welfare losses. A monetary policy regime with targeted reduction in RRR is more effective for welfare loss reduction. Additionally, gains are greater under the shock to micro and small enterprises (MSEs) than they are to both large and medium enterprises and MSEs. A clearer accountability regime can yield lower loss. Specifically, targeted reduction in RRR should be responsible for employment and financial stability.

Keywords: Targeted reduction in reserve requirement ratio; Optimal monetary policy; Micro and small enterprises; Unemployment; Financial instability (search for similar items in EconPapers)
JEL-codes: C73 D61 E52 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:69:y:2020:i:c:p:209-230

DOI: 10.1016/j.iref.2020.04.002

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