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What Drives China's Interbank Market?

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  • International Monetary Fund

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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Bibliographic Info

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

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Length: 30
Date of creation: 01 Sep 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/189

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Keywords: Monetary policy; China; Banking sector; Central bank policy; Economic models; Interest rates; Interest rates on deposits; Liquidity; reserve requirements; bond; deposit rate; reserve requirement; bonds; bond market; deposit rates; open market operations; central bank; bond markets; monetary fund; monetary policy instruments; financial markets; bond yields; money markets; money market; interest rate liberalization; inflation; treasury bonds; corporate bond; financial bonds; financial market; bond issues; financial institutions; financial liberalization; government bond; stock exchanges; monetary growth; financial assets; stock banks; bond issuance; interest rate targeting; bond yield; asset valuations; financial intermediation; corporate bond issuance; derivatives market; financial sector; corporate bonds; equity markets; bond rates; financial fragility; financial market development; demand for bonds; government bond market; financial system; bank bond; bond transactions; corporate bond market; money market rates; government bonds; development of bond markets;

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References

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  1. Mehrotra, Aaron & Koivu, Tuuli & Nuutilainen, Riikka, 2008. "McCallum rule and Chinese monetary policy," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 15/2008, Bank of Finland, Institute for Economies in Transition.
  2. Bernard Laurens & Rodolfo Maino, 2007. "China," IMF Working Papers 07/14, International Monetary Fund.
  3. Giuseppe Bertola & Leonardo Bartolini & Alessandro Prati, 2000. "Banks' Reserve Management, Transaction Costs, and the Timing of Federal Reserve Intervention," IMF Working Papers 00/163, International Monetary Fund.
  4. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(3), pages 339-50, July.
  5. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2002. "The Overnight Interbank Market: Evidence from the G7 and the Euro Zone," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3090, C.E.P.R. Discussion Papers.
  6. International Monetary Fund, 2009. "Interest Rate Liberalization in China," IMF Working Papers 09/171, International Monetary Fund.
  7. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(1), pages 26-56, February.
  8. Moschitz, Julius, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series, European Central Bank 0393, European Central Bank.
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Cited by:
  1. He, Dong & Wang, Honglin, 2012. "Dual-track interest rates and the conduct of monetary policy in China," China Economic Review, Elsevier, Elsevier, vol. 23(4), pages 928-947.
  2. Thierry Apoteker, 2009. "La Chine : accélération des transformations et nouveaux défis," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 95(2), pages 207-228.
  3. Nathan Porter & Nuno Cassola, 2011. "Understanding Chinese Bond Yields and their Role in Monetary Policy," IMF Working Papers 11/225, International Monetary Fund.
  4. Dong He & Honglin Wang, 2013. "Monetary Policy and Bank Lending in China - Evidence from Loan-Level Data," Working Papers, Hong Kong Institute for Monetary Research 162013, Hong Kong Institute for Monetary Research.
  5. Willmott, Bryony, 2014. "Excess reserves, interbank markets and domestic money market intervention," MPRA Paper 57046, University Library of Munich, Germany.
  6. Alicia Garcia-Herrero & Eric Girardin, 2013. "China's Monetary Policy Communication: Money Markets not only Listen, They also Understand," Working Papers, Hong Kong Institute for Monetary Research 022013, Hong Kong Institute for Monetary Research.
  7. Yinqiu Lu, 2012. "What Drives the POLONIA Spread in Poland?," IMF Working Papers 12/215, International Monetary Fund.

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