Abstract: We have sorted out and compared the commonly used quantitative policy tools of the central bank, including targeted re-lending (PSL), structural monetary policy, reserve requirement ratio (RRR) cuts, foreign exchange purchases, government bond purchases, medium-term lending facility (MLF), and reverse repo transactions. By analyzing the characteristics and transmission mechanisms of each policy tool, we explore which quantitative monetary policy tool is most effective in promoting credit expansion.
Our hypothesis is that, given the existing fiscal and interest rate policies remain unchanged, assuming that it is necessary to increase the liquidity injection by 1 trillion to ensure the smooth operation of the economy, what would be the possible impact on total demand if different monetary policy tools are used to achieve such an injection target. We assess the possible impact of different monetary policy tools on total demand from two aspects. First, is the released liquidity certain? Second, can credit expansion ultimately be achieved? Our assessment results show that, given the background of fiscal and interest rate policies, the effectiveness of the six quantitative monetary policy tools is ranked as: PSL > Structural Monetary Policy > RRR Cuts > Foreign Exchange Intervention > MLF > Reverse Repo.
Under the above framework, we further discuss the economic implications of the "central bank increasing the purchase and sale of government bonds in open market operations," which has recently been a hot topic in the market.
