Macroeconomics,Monetary Policy And Term Structure Of Interest Rates

Many researches of scholars at home and abroad show that, the term structure of interest rates have predictive power for macroeconomic variables; at the same time, the term structure of interest rates are not only dependent upon monetary policy, and also reflecting the effect of the mechanism of monetary policy, which provide useful information for policy makers. In the interest rate marketization the economies, the central banks determine the short-term interest rate according to the Taylor rule (Taylor,1993), to influence aggregate demand through the effects of long-term interest rates, and then menegment the output and inflation. After the financial crisis, importance of the term structure of interest rates is further strengthened for central banks, by influencing the yield curve to impact macroeconomic. As full-blown financial crisis after2008, the American benchmark interest rate faced to zero lower bound, there was no more spacer of further stimulating for using traditional policy tools. By using quantitative easing, operation twisting and other non-traditional quantitative policy, Fed change the interest rate term structure to achieve its policy objectives. The term structure of interest rates has become a communication bridge between price type tools and quantitative tools.With the further developing of Chinese bond market and the gradual improvement in the interest rate and exchange rate marketization reform, term structure of interest rates has a closer relationship with the macroeconomic and monetary policy in China. On the one hand, there is a high correlation between the term structure of interest rates and macroeconomic variables, which makes it possible for the term structure of interest rates as an important reference to the intermediate target of monetary policy. On the other hand, monetary policy has a significant effect on the term structure of interest rates, which also makes it accessible for us to examine the effects of monetary policy by term structure of interest rates. Therefore, study of the term structure of interest rates and its related issues, has important academic value and practical significance for analyzing and judging the situation and expectation of macro-economic, and for making effective monetary policy.The main research contents of this paper are:firstly to estimate the term structure of interest rates of China by dynamic NS hybrid model; on this basis, to explore the prediction ability of the term structure of interest rates for output and inflation; then to analysis of the dynamic effects of monetary policy on the term structure of interest rates; and the mutual influence of macro economy, monetary policy rules and the term structure of interest rates based on new Keynes model which combine with the time-varying monetary policy rule.The contents of this study are:The first chapter is the introduction, introducing the research backgrounds and significances, research ideas and framework, contents and methods of research, innovations and shortages.The second chapter is the theoretical basis and the literature review of the relationship of term structure of interest rate, macroeconomy and monetary policy.In the third chapter, we used Hybrid Nelson-Siegel models, such as DNS, AFNS and AFGNS, to dynamically estimate the term structure of interest rates in China. We investigated the dynamic estimation efficiencies of these Hybrid Nelson-Siege models, compared the prediction capabilities of the Hybrid models, and also tested the impact of the Arbitrage-Free restriction for NS models. We found that, by adding an Arbitrage-Free restriction, the out of sample forecasting and in sample estimating capability of the Hybrid Nelson-Siegel model can be enhanced. The NS models with Arbitrage-Free restriction have better performance on both in-sample and out-of-sample dynamic estimation than the other models. The AFDNS modle has a better performance on in-sample estimation and out-of-sample prediction, and its three factors has a high correlation with macroeconomic variables, which make it possible as a basic model for the term structure research.In the first part of chapter four, based on the no arbitrage-free dynamic NS model (AFDNS), we obtained three latent dynamic factors, Level, Slope and Curvature. Then we investigated the predictive ability of the latent factors on output and inflation in China. The results of the study show that:the three factor on output and inflation has been of great prediction ability, and is better than Spread carry on macro economic variables prediction; the increasing of Level and Curvature indicate the decline of future output and inflation, as well as increasing of the Slope factor (i.e.yield curve slope reduced); the three factors have ultimate predictive power in future lyear output and2year inflation. The term structure of interest rates can better explain the macro and policy information the virtue of Using AFDNS model.In the second part of chapter four, we established a smooth transition models(STR), using the three-factor of Arbitrage-Free Dynamic NS model to characterize the term structure of interest rates, to research the nonlinear relationship between the term structure of interest rates and future output in China from perspectives of both static and dynamic. The result shows that there exists a significant "threshold effect" between the term structure of interest rate and the future real GDP. From the static point of view, the asymmetry mainly manifests in the relationship between the slope of the yield curve and the GDP growth, for future economic growth will accelerate asymmetrically when the slope exceeds the threshold value. From the dynamic point of view, there are significant threshold effects between changes in the level factors or slope and the future economic growth withl2-month or more predictive period, in which change of the level factor over the past12months for the next12-month of economic growth shows the most significant nonlinear effect.In the fifth chapter, we examined how does time-varying monetar^policy rule influences the term structure of interest rates, based on the Arbitrage-Free Dynamic Nelson-Siegel model (AFDNS) to estimate China’s term structure of interest rates. Our results show in the following points. Firstly, the time-varying monetary policy rule can explain China’s monetary policy exactly. Secondly, the tighten of the Central Rank’s policy towards production gap can raise the short term of interest curve, as well as lower the long term part. The augment reaction to the inflation can raise the whole interest curve, besides, more sensitive of long term rates to the inflation reaction coefficient steepened the curve.In the sixth part, based on the New Keynesian dynamic model, we take time-varying monetary policy rules and term structure factors into account. Besides, we built a structured macro-finance model to study the mutual impact of macroeconomics, monetary policy rule and the term structure. Our results show in the following points. First, time-varying monetary policy rule changes the term structure of interest rates, ultimately affects macroeconomic. The central bank should consider the influence of the time varying policy. Secondly, impacted by monetary policy, the term structure of interest rates affects output and inflation. Thirdly, it is more effective to curb inflation by changing monetary policy rule than merely by altering short rate. Fourthly, the time varying policy rule can partly explain the "Greenspan’s Conundrum"Chapter seven is conclusions and implications of the study. Based on the analysis of China’s term structure of interest rate and macroeconomy and the monetary policy, this paper brings us some inspiration:first, there is a significant correlation between the term structure of interest rate and macro economy. Investors can judge the future economic trends and changes in inflation in the future by using the information of the term structure of interest rates, and then to make the rational investment decision; central banks can also use the useful information of term structure of interest rates for judging the effect of monetary policy, and asjust monetary policy. Second, searching laws of central banks’ monetary policy operations can help the public understand the intention of central banks’ policy, constructing more reasonable policy expectations, which allows the central bank establishing more effective communication and reasonable expectations guidance for the public. Time-varying Taylor rule model, can effectively reflect the operation of monetary policy the central bank law. Third, response of China’s monetary policy to inflation and the output gap is variable, and with a underreaction to inflation. Along with the economic development stage, the central bank should take more attention to inflation by monetary policy operations in the future. Fourth, the influence of time-varying monetary policy rules on term structure of interest rates and on macro economy should be highly concerned about.The possible innovation of this article mainly lies in:First, based on Nelson-Siegel model with no-arbitrage constraint to estimate the term structure of interest rates, is the new exploration of seeking to reasonably estimate term structure of interest rates; Second, using three factors of AFDNS model as proxy variables of term structure of interest rates, and using linear and nonlinear methods (STR) to study the relationship between the term structure of interest rates and macroeconomic variables, improve the method by only using slope which cannot fully reflect the information on the term structure of interest rates in the existing studies abroad; and make a complement for the domestic research on nonlinear relationship between the term structure of interest rates and economic growth; Third, the use of time-varying monetary policy rules model to investigate the characteristics of monetary policy in China. Combining new Keynesian model with time-varying Taylor rule, establishing structurized macro-financial models on China’s monetary policy, macroeconomic variables and of term structure of interest rates, is another innovation of this article.