The Transmission And Management Mechanism Of Policy Interest Rate Through Financial Markets

Since the 1990's, the main developed countries successively turned back to regard the interest rate as the intermediary objective of the monetary policy operation instead of the money supply. Under this operation model, a complete monetary policy transmission mechanism includes two core links: one is that the central bank chooses a base rate as the intermediary objective and changes the base rate level through the monetary policy instrument. The base rate's change will have effect on the financial markets system and give rise to the change of different variables, such as the market rates, the financial assets' prices and the foreign exchange rate etc.; the other is that after these variables change, the effects will act on the real economy via various transmission mechanisms and give rise to the aggregate demand's change and eventually realize the ultimate objective of the monetary policy. So far the research findings have been focused on the second transmission link, while it's relatively less for the first one, which is just the key research point in this paper.This paper aims at answering one essential question, that is, why in the current developed market economy countries, the central bank is able to have the transmissive effect on all types of financial assets by only adjusting and controlling a short term base rate and eventually realize the objective of the monetary policy? It requires us to go deep into the internal financial markets, study the transmission relation between the base rate and all types of financial markets and make research on the central bank's choice and administration mechanism on the base rate. Therefore, this paper regards the base rate as the main line and makes study on its transmission relation to the Treasury bond market, the corporate bond market, the stock market and the monetary market. It also makes empirical proof-test on the interest rate policy transmissive result in the current stage. On that basis, it concludes the monetary policy transmissive effectiveness via the financial markets. The detailed chapter arrangement is as follows:In the first chapter, it brings forward the main issues and key conceptions that be studied in this paper; in retrospect to historical works, it discusses the study objectives and approaches.In the second chapter, it studies the base rate change impacts in the central bank on the interest rate and yield rate in the Treasury bond market. The key research point in this part is the relation between the base rate and the interest rate term structure. It firstly studies the term structure's importance in the monetary policy transmission mechanism, and then it sets up the theoretical model and makes empirical study on the relation between the base rate and the Treasury bond yield rate and in the current stage in China, lastly it explains the empirical study results.In the third chapter, it studies the base rate's change on the corporate bond market. It firstly the credit factor's importance in the monetary policy transmission, and then it makes theoretical analysis on the relation between the changes of the base rate and the term structure of the Treasury bond rate and the credit premium of the corporate bond and loan rate. Lastly it makes empirical test-proof and explains the study results.In the fourth chapter, it analyses the impact of the base rate's change on the stock market. It firstly illustrates the significance of the assets' price effect in the stock market to the monetary policy transmission, then it sets up the theoretical model to illustrate the effect of the base rate and the T-bond term structure rate's changes on the stock price. Lastly it makes empirical study and explains the study results.In the fifth chapter, it mainly analyses relation between the base rate and the monetary market. As the monetary market is the prime link for the interest rate policy to transmit in the internal financial markets, different monetary policy instruments' effect mechanisms on the interest rate will have relatively big differences. In the mean time, under the RMB's appreciation pressure, it's necessary for the central bank to coordinate the RMB and foreign currency and adjust and control the interest rate in the foreign exchange market and the domestic monetary market as well. Therefore, in this chapter it mainly studies the central bank's controlling capacity in the monetary market interest rate and makes empirical study on the relation between the base rate in the central bank and the interest rate in the monetary market, lastly it explains the study results. The six chapter is the conclusion for this paper.