The Influence Of Market-oriented Interest Rate On Inflation

The interest rate is the price of capital. As one of the most important price signal to financial markets, it had a great influence on many factors in the economy. Such As price stability which is one of the macroeconomic objectives is closely related with the interest rate. In dealing with inflation, one often is used to adjust the interest. But as the part of a series of market reform of china, the interest rate mechanism reform has been lags behind other parts. The interest rate’s regulation has been always by government departments, which is seriously weakened the power of government on macroeconomic regulation through the interest rate channel. With the development of the market economy and the deepening reform of the financial system, the market-oriented reform of interest rate is the developing trend of the globalization on current world. In the context of China’s long-term inflationary pressures reality, the market-oriented reform of interest rates will give what kind of influence on inflation, which is what this article attempts to answer.Our special ownership structure determines that the state-owned enterprises and non-state-owned enterprises may be different from the reaction to interest rates, the different sensitivity of the state-owned enterprises and non-state-owned enterprises reaction to interest rates decide the trend of interest rates when the market-oriented reform of interest rates is complete. This trend of change decided the general equilibrium characteristics of China’s economy. In order to reveal the relationship between market-oriented reform of interest rates and inflation, we used the analytical framework of the IS-LM model. From the extension of the IS-LM model we construct a general equilibrium model based on nominal variables. And discuss relationship between interest rates and inflation in different circumstances that one is that interest rate is controlled and the other is that interest rate is reformed. Finally, we test and verify the theoretical conclusions using the actual data of our deposit and lending rates and the interbank offered rate. At the same time the characteristics of China’s inflation is expected to prospect by the trend of changes in interest rate and we propose policy recommendations to control inflation.