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Understanding Chinese Bond Yields and their Role in Monetary Policy

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  • Nathan Porter
  • Nuno Cassola

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.

Suggested Citation

  • Nathan Porter & Nuno Cassola, 2011. "Understanding Chinese Bond Yields and their Role in Monetary Policy," IMF Working Papers 11/225, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:11/225
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    References listed on IDEAS

    as
    1. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    2. Willy 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.
    3. Tarhan Feyzioglu & Nathan Porter & Elöd Takáts, 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. 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.
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    Cited by:

    1. Sowmya, Subramaniam & Prasanna, Krishna & Bhaduri, Saumitra, 2016. "Linkages in the term structure of interest rates across sovereign bond markets," Emerging Markets Review, Elsevier, vol. 27(C), pages 118-139.

    More about this item

    Keywords

    China; Bond yields; Monetary policy; Term Structure of Interest Rates; bond; bonds; inflation; treasury bonds; Financial Markets and the Macroeconomy;

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