Estimating The Natural Real Interest Rate For China And Its Monetary Policy Implications

In recent years, With the deepening of China’s financial reform, the market-oriented interest rate reform growing louder and louder. The People’s Bank of China has paid more attention to the lever-regulatory role of interest rate policy tool in the macro-control. The natural real interest rate as an important variable in the process of monetary policy control, which has a close contact with the macro-economic target variables such as output growth, inflation, and which also plays a very important role in the formulation and implementation of monetary policy, and the effects of monetary policy.In this thesis, we put the natural real interest rate as the object of study, and give a forecast of the natural real interest rate in China by building a state space model and the Kalman filter method. It is find that the trend of our natural real interest rate is down and up in recent years, and the fluctuations in frequency and amplitude are tremendous. Then, we use the Regression analysis, Granger causality test and VAR model to test the relationship of the natural real interest rate, output gap, inflation and the monetary policy implications; we find that the output gap is granger causality of the natural real interest rate and their show weak negative correlation. Meanwhile, by the estimating of the natural real interest rate, we can be able to evaluate the trend of future inflation, and the natural real interest rate is negative of future inflation. Finally, we introduce the money supply, and establish the VAR model which contain the output gap, the natural real interest rate, the first difference of the inflation rate and the monetary supply, then in order to reflect the monetary policy information of the natural real interest rate and the relative tightness of monetary policy, we describe the dynamic response of the money supply under the impulse response of the natural real interest rate. On this basis, we proposed some policy recommendations to help the market-oriented interest rate reform and future monetary policy control in China.