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What Drives China's Interbank Market?

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Author Info
Nathaniel John Porter
TengTeng Xu

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Abstract

Interest rates in China comprise a mix of both market determined interest rates (interbank rates and bond yields), and regulated interest rates (lending and deposit rates), reflecting China's gradual process of interest rate liberalization. We argue, using a theoretical model and empirical analysis, that the regulation of key retail interest rates diminishes the ability of the market determined rates to act as independent price signals, or as benchmarks for use in asset pricing and monetary policy. Further interest rate liberalization should, therefore, strengthen the information conveyed by movements in interest rates, allowing for the better pricing of risk and capital.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/189.

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Length: 30 pages
Date of creation: 08 Sep 2009
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Handle: RePEc:imf:imfwpa:09/189

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Keywords: Asset prices ; Bank regulations ; Banking sector ; Bond markets ; Capital markets ; Central bank policy ; China; People's Republic of ; Economic models ; Interest rates ; Interest rates on deposits ; Interest rates on loans ; Liquidity ; Monetary policy ; Pricing policy ;

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  1. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February. [Downloadable!] (restricted)
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  2. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
  3. Alessandro Prati & Leonardo Bartolini & Giuseppe Bertola, 2001. "The overnight interbank market: evidence from the G-7 and the Euro zone," Staff Reports 135, Federal Reserve Bank of New York. [Downloadable!]
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  4. Leonardo Bartolini & Giuseppe Bertoli & Alessandro Prati, 2000. "Banks' Reserve Management, Transaction Costs, and the Timing of Federal Reserve Intervention," Econometric Society World Congress 2000 Contributed Papers 0123, Econometric Society. [Downloadable!]
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This page was last updated on 2009-12-17.

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