IDEAS home Printed from https://ideas.repec.org/p/bof/bofitp/2011_021.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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 model the transmission of monetary policy instruments to market interest rates, which, together with the quantitative 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. ?

Suggested Citation

  • He, Dong & Wang, Honglin, 2011. "Dual-track interest rates and the conduct of monetary policy in China," BOFIT Discussion Papers 21/2011, Bank of Finland, Institute for Economies in Transition.
  • Handle: RePEc:bof:bofitp:2011_021
    as

    Download full text from publisher

    File URL: https://helda.helsinki.fi/bof/bitstream/123456789/7995/1/169292.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Geiger, Michael, 2006. "Monetary Policy in China (1994-2004): Targets, Instruments and their Effectiveness," W.E.P. - Würzburg Economic Papers 68, University of Würzburg, Chair for Monetary Policy and International Economics.
    2. Dong He & Laurent L. Pauwels, 2008. "What Prompts the People's Bank of China to Change Its Monetary Policy Stance? Evidence from a Discrete Choice Model," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 16(6), pages 1-21.
    3. Masao Ogaki & Jonathan D. Ostry & Carmen M. Reinhart, 1996. "Saving Behavior in Low- and Middle-Income Developing Countries: A Comparison," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 38-71, March.
    4. Tarhan Feyzioglu & Nathan Porter & Elöd Takáts, 2009. "Interest Rate Liberalization in China," IMF Working Papers 09/171, International Monetary Fund.
    5. Nicholas R. Lardy, 2008. "Financial Repression in China," Policy Briefs PB08-8, Peterson Institute for International Economics.
    6. International Monetary Fund, 2009. "What Drives China’s Interbank Market?," IMF Working Papers 09/189, International Monetary Fund.
    7. Dickinson, David & Liu, Jia, 2007. "The real effects of monetary policy in China: An empirical analysis," China Economic Review, Elsevier, vol. 18(1), pages 87-111.
    8. Yingyi Qian, 1999. "The Institutional Foundations of China's Market Transition," Working Papers 99011, Stanford University, Department of Economics.
    9. 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.
    10. 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.
    11. Fan, Longzhen & Zhang, Chu, 2007. "Beyond segmentation: The case of China's repo markets," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 939-954, March.
    12. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, March.
    13. Qin, Duo & Quising, Pilipinas & He, Xinhua & Liu, Shiguo, 2005. "Modeling monetary transmission and policy in China," Journal of Policy Modeling, Elsevier, vol. 27(2), pages 157-175, March.
    14. Bernard J Laurens & Rodolfo Maino, 2007. "China; Strengthening Monetary Policy Implementation," IMF Working Papers 07/14, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bof:bofitp:2011_021. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Minna Nyman) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/bofitfi.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.