A Study On Connection Of Monetary Policy And Term Structure Of Interest Rate Of Treasury Bonds In China

With the accelerating pace of financial marketization in China, development of financial market and ever-deepening regulation of indirect monetary policy, the current model of monetary policy that takes reserve fund and reloan as main quantitative tools while taking price, employment and international balance of payment as multiple targets, will definitely transform into the monetary policy framework with single target and taking interest rate price as the main tool. Term structure of interest rate will certainly play an increasingly important role in the formulation process of monetary policies in China. Term structure of interest rate implies abundant information about monetary policy and is helpful for the central bank to control the economy in time. Meanwhile, the central bank may know the effect and the validity of monetary policies by means of comparing the term structures before and after the monetary policy was implemented.This paper has comprehensively studied the correlation between term structure of interest rate of treasury bonds and monetary policy. First of all, this paper introduced he traditional theories on term structure of interest rate and the new development. On such basis, this chapter reviewed the existing literatures from three aspects, i.e. implied information about monetary policy in term structure of interest rate, impacts of monetary policy on term structure of interest rate and mutual interactions between them. Afterwards, studies on correlation between term structure of interest rate and macroeconomic variables was reviewed from such aspects as fiscal policy, periodical fluctuation of economy, term structure of interest rate and other macroeconomic variables. We also introduced the studies on the unsymmetrical effect for the monetary policy.We went to the empirical analysis sector. First of all, we wanted to know if the term structure of interest rate implies the information about monetary policy. According to the result of Granger Causality Test, the slope and level factor in term structure of interest rate implies the information about monetary policy. According to impulse response analysis, slope has negative response to tightening monetary policy, which is consistent with the expected result; while level factor has negative response, too, which is inconsistent with the expected result. The possible reason may be that level factor has closer relationship with expected inflation, but more insensitive to monetary policy than slope. Correlation analysis has found that, there is strong positive correlation between level factor in term structure of interest rate and expected inflation. It reflects the expectations of investor for future inflation; there is strong positive correlation between slope in term structure of interest rate and expected inflation as well. So the inflation in the next6months can be predicted.We studied the impacts of monetary policy on term structure of interest rate from three views.This paper has taken the transaction data of treasury bonds from2003to2008as sample, adopted Nelson-Siegel model to estimate the three model parameters reflecting term structure of interest rate of treasury bonds, i.e. level factor, slope factor and curvature factor. On such basis, suppose the evolutionary process of time series vector composed of three parameter sequences is dominated by certain latent variable, and this latent variable is subject to Markov Regime Switching (2regimes). This chapter constructed MS-VAR model that reflected the impact of latent variable on changes of term structure of interest rate, and used this model to empirically test the impact of latent variable switching on term structure of interest rate of treasury bonds. According to the result, this latent variable is stock market cycle. Under the impact of monetary policy, the switching of stock market cycle has significant impact on the changes of term structure of interest rate of treasury bonds in China.Since the changes of monetary policy can affect the term structure of interest rate, theoretically speaking, as an important part of monetary policy, the changes of exchange rate policy can trigger the changes of term structure of interest rate, too. This chapter adopted the data of treasury bonds in Shanghai Stock Exchange, estimated the parameters of Nelson-Siegel model, and obtained times series of level factor and slope (negative of slope factor) in term structure of interest rate of treasury bonds. On such basis, MS-VAR model was adopted for single-variable MS-AR model test on four time series of RMB exchange rate against the dollar, bank’s average interest rate for overnight loans, level factor and slope of term structure of interest rate of treasury bonds. According to the empirical result, time series of RMB exchange rate against the dollar, level factor and slope of term structure of interest rate of treasury bonds have undergone structural changes around July2005, while the time series of bank’s average interest rate for overnight loans had gone through structural changes in April2005even before exchange rate reform. On such basis, multi-variable MS-VAR model test was conducted on time series of logarithmic negative growth of RMB exchange rate, first-order difference of bank’s average interest rate for overnight loans, level factor and slope of term structure of interest rate of treasury bonds. And the impulse response of level factor and slope in term structure of interest rate of treasury bonds to the dynamic impact of logarithmic negative growth of RMB exchange rate was investigated. According to the result, the reform of exchange rate system and corresponding adjustment of monetary policy have collectively accounted for the changes of level factor and slope in term structure of interest rate of treasury bonds in Shanghai Stock Exchange.We has taken bank’s average interest rate for overnight loans as proxy variable of monetary policy, estimated the times series of level factor and slope in Nelson-Siegel Model according to the data of Treasury Bond Market in Shanghai from October2003to March2011. MS-VAR model has been utilized to study the impact of monetary policy changes on term structure of interest rate of treasury bonds under different cycles of monetary policies. According to empirical result, when monetary policy switches from loosening cycle to tightening cycle, level factor will increase, while slope will decrease. Faced with the impact of tightening monetary policy, level factor has positive response during loosening period of monetary policy, and negative response during tightening period of monetary policy, while slope has negative response in both cases.The final part is the conclusion and prospects of this paper. Based on brief summarization of conclusions in each chapter, this part has predicted the future research trend in this field.