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Dual-track interest rates and the conduct of monetary policy in China

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  • He, Dong
  • Wang, Honglin

Abstract

China has a dual-track interest-rate system: bank deposit and lending rates are regulated while money and bond rates are market-determined. The central bank also imposes an indicative target, which may not be binding at all times, for total credit in the banking system. We develop and calibrate a theoretical model to illustrate the conduct of monetary policy within the framework of dual-track interest rates and a juxtaposition of price- and quantity-based policy instruments. We show the transmission of monetary policy instruments to market interest rates, which, together with the indicative credit target in the banking system, ultimately are the means by which monetary policy affects the real economy. The model shows that market interest rates are most sensitive to changes in the benchmark deposit interest rates, significantly responsive to changes in the reserve requirements, but not particularly reactive to open market operations. These theoretical results are verified and supported by both linear and GARCH models using daily money and bond market data. Overall, the findings of this study help us to understand why the central bank conducts monetary policy in China the way it does, using a combination of price and quantitative instruments with differing degrees of potency in terms of their influence on the cost of credit.

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Bibliographic Info

Article provided by Elsevier in its journal China Economic Review.

Volume (Year): 23 (2012)
Issue (Month): 4 ()
Pages: 928-947

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Handle: RePEc:eee:chieco:v:23:y:2012:i:4:p:928-947

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Web page: http://www.elsevier.com/locate/chieco

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Keywords: Monetary policy; People's Bank of China; Dual-track interest rates; Interest rate liberalization;

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References

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  1. Yingyi Qian, 1999. "The Institutional Foundations of China's Market Transition," Working Papers 99011, Stanford University, Department of Economics.
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  5. He, Dong & Wang, Honglin, 2012. "Dual-track interest rates and the conduct of monetary policy in China," China Economic Review, Elsevier, vol. 23(4), pages 928-947.
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  8. International Monetary Fund, 2009. "Interest Rate Liberalization in China," IMF Working Papers 09/171, International Monetary Fund.
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Cited by:
  1. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2013. "The impact of excess reserves beyond precautionary levels on Bank Lending Channels in China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 358-377.
  2. Fernald, John G. & Spiegel, Mark M. & Swanson, Eric T., 2014. "Monetary policy effectiveness in China: evidence from a FAVAR model," Working Paper Series 2014-7, Federal Reserve Bank of San Francisco.
  3. He, Dong & Wang, Honglin, 2012. "Dual-track interest rates and the conduct of monetary policy in China," China Economic Review, Elsevier, vol. 23(4), pages 928-947.
  4. Dong He & Honglin Wang, 2013. "Monetary Policy and Bank Lending in China - Evidence from Loan-Level Data," Working Papers 162013, Hong Kong Institute for Monetary Research.
  5. Alicia Garcia-Herrero & Eric Girardin, 2013. "China's Monetary Policy Communication: Money Markets not only Listen, They also Understand," Working Papers 022013, Hong Kong Institute for Monetary Research.
  6. Dong He & Honglin Wang & Xiangrong Yu, 2014. "Interest Rate Determination in China: Past, Present, and Future," Working Papers 042014, Hong Kong Institute for Monetary Research.
  7. Jing Wu & Joseph Gyourko & Yongheng Deng, 2013. "Is There Evidence of a Real Estate Collateral Channel Effect on Listed Firm Investment in China?," NBER Working Papers 18762, National Bureau of Economic Research, Inc.

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