Three tools of monetary policy

The three traditional monetary policy tools of the central bank refer to:

1. Deposit reserve

Deposit reserve refers to the funds prepared to limit the credit expansion of financial institutions, ensure customers to withdraw deposits and meet the needs of fund settlement. The statutory deposit reserve ratio is the ratio of the deposit reserve paid by financial institutions to the central bank in accordance with regulations to the total deposits.

2. Open market business

The open market refers to a market where all kinds of securities are freely traded and negotiated, and the trading volume and price must be publicly displayed. Open market business refers to the activities of the central bank to adjust the credit scale, money supply and interest rate by buying and selling securities in the open market, so as to realize its financial regulation. It is the most important tool of monetary policy.

3. Re-discount

Discounting refers to the bill transfer behavior in which the holder pays a certain interest to the bank in order to get cash before the bill expires. Re-discounting means that commercial banks or other financial institutions transfer the unexpired bills obtained by discounting to the central bank.

Monetary policy, that is, financial policy, refers to various principles, policies and measures adopted by the People's Bank of China to control and regulate the money supply and credit quantity in order to achieve its specific economic goals. The essence of monetary policy is that the country's money supply adopts different policy trends such as "tight", "loose" or "moderate" according to the economic development in different periods.

Using various tools to adjust the money supply to adjust the market interest rate, the change of market interest rate will affect private capital investment and total demand to affect macroeconomic operation. The three tools of monetary policy to adjust aggregate demand are statutory reserve ratio, open market business and discount policy.

Central bank background:

(1) Rapid development of commodity economy1At the beginning of the 8th century, the industrial revolution began in western countries. With the rapid development of social productive forces and the rapid expansion of commodity economy, the currency management industry has become more and more common and the profits have become more and more abundant, which has led to the desire to control monetary wealth.

(2) The frequent occurrence of capitalist economic crisis will inevitably lead to the persistence of economic crisis. Facing the situation at that time, the bourgeois government began to look for reasons from the monetary system in an attempt to control, avoid and save frequent economic crises by issuing bank notes.

(3) With the widespread establishment of commercial banks and the rapid development of commodity economy, the banking industry has gradually prospered. The rapid development of commodity economy and the rise of capitalist mode of production not only promoted the transformation of money changers in continental Europe into commercial banks, but also accelerated the emergence of new banks.

(4) The relationship between monetary credit and economy is universal. The industrial revolution of capitalism promoted the unprecedented improvement of productivity, which in turn promoted the vigorous development of capitalist bank credit industry.

(5) The rapid development of capitalist commodity economy, the frequent occurrence of economic crises and the popularization and centralization of bank credit not only laid the economic foundation for the emergence of the central bank, but also provided objective requirements for the emergence of the central bank.