The Impact Of Open Market Operations On China's Interest Rate Market And Stock Market

Open market operations (OMOs), as one of the most important tools for the monetary policy, are the Central Bank's primary operations for managing the liquidity of the banking system and the cash flows between the government and the banking system, and then guiding the currency markets interest rate changes. From the people's bank of China restored the OMOs in 1998 to now, the OMOs in China has achieved great development and also played an important role in stabilizing the financial market, especially in process of Coping with the global financial crisis, the People's Bank of China frequently use of OMOs to regulate the market liquidity. But in the incomplete macroeconomic environment and the financial institutions, can the OMOs truly play its effectiveness or not? Therefore, this paper is designed to discuss the development situation of OMOs in China, and to research the impact that the OMOs plays to the interest rate market and the stock market affect in China.First, this paper collected OMOs views from the modern monetary theory to summary the operating mechanism of the OMOs. Second, comparing with the OMOs situation in the United States, we summarize the deficiencies that exist in the OMOs development process. Finally, this paper empirically analyses the affects that OMOs has on the interest rate market and stock market in China, thus examines the OMOs'effectiveness in China's macroeconomic environment increasingly perfect conditions.In detail, this article is divided into six chapters. In the first chapter, after simply introducing the research background and significance of the paper, we mainly summarize the research results of the scholars both at home and abroad about the affects that the monetary policy and OMOs have on the interest rate market and stock market, and on this basis point out the research ideas and innovations.In the second chapter, we summarize theories related to the OMOs from the modern monetary theory. Among them, the opinion about the interest rate that influences the money demand and the supply in Keynes monetary theory directly contribute to establish the OMOs'operating goals and operating channel, and preliminarily lay the foundation for the development of the OMOs. Monetarism monetary theory influences the OMOs selecting its operating mechanism and tools, so it pushes the OMOs to a higher stage. But the Neoclassicism considers that the OMOs is not effective. Finally, in the basis of theoretical analysis results, we summary the OMOs'operating mechanism, OMOs—Nonborrowed reserve—Reserve number—Monetary base—Money Supply.In the third and fourth chapter, this paper makes a comparison between the mature American OMOs and the developing Chinese OMOs to get the revelation that improves the Chinese OMOs'development. Through analyzing the current situation of American OMOs, we find out that it is the weaknesses of frame mechanism and basic conditions that restrict the development and expansion of Chinese OMOs. For instance, firstly, compared with the independent actuators and decision-making organ in U.S., Chinese major decisions of monetary policy are controlled in the State Council, while the People's Bank of China only take charge of offering suggestions about important monetary policy and executing it. Secondly, underdeveloped monetary market sets a limit to choose the OMOs'operating tools. Third, unfinished Interest Rate Liberalization hinders the operating goal turning into the monetary market interest rates and the effectiveness of the OMOs transferring between different rates markets.In the fifth chapter, we use the EGARCH model to empirically analyze the interest rate market and stock market reaction to the OMOs in China. Results show that the significant negative relationship between the daily turnover rates of OMOs and Shibor rate of one week means that a'cash drain'operation, where the People's Bank of China sells of government securities, for instance, can drives up the prices and returns in interest rate markets, and the impact that the OMOs has on the interest rate market is asymmetric. There is no significant relationship between the OMOs and the stock market, that is to say the OMOs can not significantly influence the money that invested in the stock market.