Inflation, Monetary Policy and Reserve Requirement Ratio Adjustments in China

Abstract

This study examines the relationship between inflation rate and reserve requirement ratio in China. Our findings show that there is a long-term relationship between reserve requirement ratio and inflation rate. In the short-run, the central bank adjusts the reserve requirement ratio upwards faster than they adjust them downwards. The asymmetric adjustment reflects the fact the Chinese economy was overheating over the past few years as a result of the stimulus package implemented after the onset of the global financial crisis and inflation was threatening the stability of the society.

Keywords

China / monetary policy / reserve requirements / inflation / error correction model

RIGHTS & PERMISSIONS

2014 Higher Education Press and Brill