Dual-track interest rates and the conduct of monetary policy in China
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.
|Date of creation:||22 Aug 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland|
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
Web page: http://www.suomenpankki.fi/bofit_en/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tarhan Feyzioglu & Nathan Porter & ElÃ¶d TakÃ¡ts, 2009. "Interest Rate Liberalization in China," IMF Working Papers 09/171, International Monetary Fund.
- Masao Ogaki & Jonathan David Ostry & Carmen Reinhart, 1995.
"Saving Behavior in Low and Middle-Income Developing Countries: A Comparison,"
IMF Working Papers
95/3, International Monetary Fund.
- 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.
- Reinhart, Carmen & Ogaki, Masao & Ostry, Jonathan, 1996. "Saving Behavior in Low- and Middle-Income Developing Countries: A Comparison," MPRA Paper 6978, University Library of Munich, Germany.
- Reinhart, Carmen & Ogaki, Masao & Ostry, Jonathan, 1995. "Saving behavior in low- and middle-income developing countries," MPRA Paper 13757, University Library of Munich, Germany.
- Nicholas R. Lardy, 2008. "Financial Repression in China," Policy Briefs PB08-8, Peterson Institute for International Economics.
- 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.
- Dong He & Honglin Wang, 2011.
"Dual-Track Interest Rates and the Conduct of Monetary Policy in China,"
212011, Hong Kong Institute for Monetary Research.
- 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.
- 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.
- Dong He & Laurent Pauwels, 2008.
"What Prompts the People's Bank of China to Change its Monetary Policy Stance? Evidence from a Discrete Choice Model,"
0806, Hong Kong Monetary Authority.
- 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.
- International Monetary Fund, 2009. "What Drives Chinaâ€™s Interbank Market?," IMF Working Papers 09/189, International Monetary Fund.
- 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.
- 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.
- Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, June.
- 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.
- Bernard Laurens & Rodolfo Maino, 2007. "China: Strengthening Monetary Policy Implementation," IMF Working Papers 07/14, International Monetary Fund.
- 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.
- Yingyi Qian, 1999. "The Institutional Foundations of China's Market Transition," Working Papers 99011, Stanford University, Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:hhs: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: (Päivi Määttä)
If references are entirely missing, you can add them using this form.