A Study On Correlation Of Treasury Yield Curve And Monetary Policy In China

Along with the deepening of interest rate marketization, treasury yield curves, as a representative of risk-free interest rate in the market, play an important role in the financial market and even in economic society. In the bond market, the changes of yield curve reflect changes of funds supply and demand situations in the short-term, and of risk premium of long-term funds. On the macroeconomic level, how the monetary policy targeted on short-term interest affects long-term economic targets, relies on the transmission mechanism of short-term and long-term interest rates on treasury yield curves. The transmission mechanism is not only a traditional theory explaining the shape of treasury yield curve, but also the intermediate process between operation variables and ultimate goals of Monetary Policy, so the treasury yield curve can be an intermediate index connecting Monetary Policy and macroeconomic.Based on discussing the relation between the treasury yield curve and Monetary Policy, the paper also studies the feasibility of observing the treasury yield curves as a Monetary Policy intermediate index. In some chapters we will propose a view that those two issues are identical in certain sense. The feasibility of this paper refers to verifying "three Features" (testability, relevance and controllability) of Monetary Policy immediate index, by discussing the relations of treasury yields curve. Monetary Policy and macroeconomic indices. And it will be explained that treasury yields curve, also as an alternative index, is based on the theory of interest rate monetary policy immediate index.In order to demonstrate the issues above, this article will elaborate the related issues from both theoretical and empirical aspects. Firstly, the discussion will include economic growth and inflation targets which stand for the ultimate goals of Monetary Policy, and operating targets of Monetary Policy, and the theoretic relations between those variables and treasury yield curve will be discussed. The conclusion shows that the changes of Monetary Policy led to the changes of Treasury yield curve and the ultimate goal of monetary policy, however, the transmission from Monetary Policy to the ultimate goal needs Treasury yield curve, and the changes of Treasury yield curve often reflect the changes of macroeconomic indices. Afterwards, the treasury yields curve and the economic data from June,2006 to December,2009 will be used to verify the theoretic results, by abstracting three main underlying factors from the Treasury yield curve changes, which are level, steepness and curvature. Granger Causality Test will be applied to determine the causality between all variables sequences and potential factors, and the distributed lag models will be applied to do static analysis on the series with causality. Finally, by building macro-financial VAR models including potential factors and macroeconomic indices, the impulse response function diagram will be applied to do the dynamic analysis on the variation relations of the Treasury yield curve, China's monetary policy operation indices and the ultimate goals.