A Study On Interest Rate Transmission Mechanism Of China 's Monetary Policy

Monetary policy transmission mechanism is a mechanism that describes the whole process of how monetary policy tools to guide the intermediate variables to change, then affect the ultimate goal to change. Monetary policy transmission mechanism plays an extremely important role to the world both in the implementation and analysis of monetary policy. However, due to the different countries always with the different political and economic system, their choice of monetary policy transmission channels may be different. Because of these, monetary policy transmission channel has been the core content of monetary policy theory. In addition, the effective transmission of monetary policy is important for boosting market confidence, promoting economic development and stabilizing the fluctuations.Since the 1980s, with financial innovation, advancement and development of information technology and financial integration, making the stability of the link between the money supply and economic activity is broken. Many western central banks have abandoned the money supply indicator, but instead of interest rate as an intermediate target, which owns relatively more testability, controllability and correlation characteristics. China’s reform is more than 30 years. The transmission mechanism of monetary policy is also developed by a single bank credit transmission mechanism to bank credit, interest rates, exchange rates and asset prices transmission mechanism coexist. With the development of market-oriented reform of interest rates, the central bank can use monetary policy tools to guide market interest rates, thus the importance of monetary policy will be notable gradually. In the future, interest rate transmission mechanism might become the main transmission channels of monetary policy.The main ideas of this article are as follows. It is based on three macro backgrounds, which are interest rate liberalization; the trend of monetary policy regulation changing from the quantity control to price control; the Shibor being the benchmark interest rate of money market. Through the existing research on the interest rate selection and monetary policy transmission mechanism to sort out and make comments, the author describes the classical theory of interest rate transmission mechanism. Then analyze the conduction path of three monetary policy tools. Under the guidance of the IS-LM model, the author studies on the interest rate transmission mechanism of monetary policy in China by the empirical analysis.The main research methods of this article are as follows. The author uses the mainstream method to analyze the economic time series data, including X11 seasonal adjustment, ADF unit root test, Johansen Cointegration test and Granger causality test, to get the effectiveness of mechanism of monetary policy in China from a long-term perspective. On this basis, the author makes dynamic analysis through the vector Autoregressive models and impulse response functions.The basic conclusions of this paper are as follows. First, the conduction of monetary policy instruments to market interest rates is good. Second, the conduction of market interest rates to the real economy still needs to be strengthened.As can be seen from the empirical results, the participants of financial market are sensitive to interest rate policy after years of the game between the participants and the central bank. Regulation of money market interest rates on fixed-asset investment is weak. Because a lot of fixed-asset investment is decided by the government, not by the market. Due to bonds yield to maturity term structure in China is not perfect, making medium-and long-term bond yield in the economy is weaker than the short-term bond yield. Therefore, to China’s interest rate transmission mechanism of monetary policy, the central bank monetary policy tools can effectively control the rate of financial markets, but the serving function of financial markets to the real economy needs to be improved. Obviously, the reform of economic system, the development and improvement of financial market, market-oriented interest rate reform etc. must continue.The main innovations of the article are as follows. One is verifying shibor can be benchmark interest rate of money market through the study of the interest rate transmission mechanism of monetary policy. The other one is the author can find the characteristics and problems of China’s monetary policy transmission with the analysis of vertical path and horizontal comparison.