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Understanding Chinese Bond Yields and their Role in Monetary Policy

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  • Nathan Porter
  • Nuno Cassola
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    Abstract

    China's financial prices are informative enough for the PBC to introduce a monetary policy framework centered around interest rates. While bond yields are not fully efficient�reflecting regulation, liquidity, and segmentation�we find they contain considerable information about the state of the economy as well as evidence of an emerging transmission channel: changes in PBC rates influence the structure of Treasury, financial, and corporate bond yield curves, which are then associated with changes in growth and inflation. Coporate spreads are also a leading indicator of growth and inflation. While further liberalization will strengthen both efficiency and transmission, several necessary elements to move towards indirect monetary policy are already in place.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/225.

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    Length: 42
    Date of creation: 01 Sep 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/225

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    Related research

    Keywords: Bonds; Interest rate structures;

    This paper has been announced in the following NEP Reports:

    References

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    1. Francis X. Diebold & Canlin Li, 2002. "Forecasting the Term Structure of Government Bond Yields," Center for Financial Institutions Working Papers 02-34, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
    3. International Monetary Fund, 2009. "Interest Rate Liberalization in China," IMF Working Papers 09/171, International Monetary Fund.
    4. International Monetary Fund, 2009. "What Drives China's Interbank Market?," IMF Working Papers 09/189, International Monetary Fund.
    5. Alexander W. Hoffmaister & Jorge Roldos & Anita Tuladhar, 2010. "Yield Curve Dynamics and Spillovers in Central and Eastern European Countries," IMF Working Papers 10/51, International Monetary Fund.
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