A Study On The Effect Of Interest Rate Transmission Mechanism In China In The Process Of Interest Rate Liberalization Reform

The interest rate transmission mechanism is a mechanism and process which describes how the monetary policy guides interest rates, and then interest rates influence the behavior of the microeconomic subject, thus ultimately affecting macro economy. In China, the interest rate marketization reform is still in process with everything in good order and well arranged, and initial results have been achieved.With the continuous advance,the role of the interest rate transmission mechanism becomes increasingly important. Therefore, it’s of great theoretical and practical significance to study on the effect of interest rate transmission mechanism in China in the process of interest rate liberalization reform.Based on Keynes’s theory of interest rate transmission and the fact that China is still in the process of interest rate liberalization reform,we would study on the effect of dual-track interest rate transmission mechanism in China, and learn how it changes in the process of interest rate liberalization reform. After the analysis of the factors which block interest rate transmission mechanism, we would put forward corresponding suggestions to promote interest rate liberalization reform and to improve the interest rate conduction effect.Given that the research is done under the background of interest rate marketization reform, the author first summarizes the theory supports of interest rate marketization, including the theory of financial repression,the theory of financial deepening,and the one of financial constraint. On the basis of the concerning theories of liberalization of interest rate, this paper also briefly introduces the process of interest rate liberalization reform in China, including the liberalization of deposit interest rates,loan interest rates and the interest rates in inter-bank lending market and bond market.Second, combining with the characteristics of current system of interest rate,this paper puts forward the interest rate transmission mechanism in China based on Keynesian theory. The traditional Keynesian theory of interest rate transmission mechanism is based on the commodity market and capital market which are functional,with a lot of assumptions. However,the marketization of commodity market and capital market in China needs to be improved, and the theory has certain limitation. After the summery and analysis of the current interest rate system and its characteristics, this paper puts forward the "double track" interest rate transmission mechanism,where control rates and market rates operate at the same time.Third, based on the fact that the interest rate marketization reform has not yet been completed, and the fact that control rate and market rate work at the same time, this paper builds a VAR system, including control rate and market rate. Through the empirical research methods,such as Granger causality test, impulse response analysis and variance decomposition analysis,we study the effect of the dual-track interest rate transmission mechanism. The results show that the whole conduction effect of interest rate transmission mechanism is not clear as a result of the existence of interest rate control, the insensitivity of corporate investment to interest rates, the behavior of commercial banks, the weakness of financial market development. However, along with the advancement of marketization of interest rate, the conduction effect of control rate and market rate shows regular dynamic characteristics. On the one hand, the conduction effect of control interest rate adjustment on economic fluctuation is gradually decreased.On the other hand, the conduction effect of changes in market interest rates on economic fluctuations tends to be stronger and more sustainable. This also means that the reform of interest rate liberalization in China has made phased achievements. Finally, this paper summarizes the main conclusions, and puts forward some policy suggestions.First, we should speed up the reform of interest rate liberalization. Second, sensitivity of the entity economy to interest rates is to be improved.Third,it’s important to further develop and perfect the financial market. Fourth, the control mechanism of the central bank is suggested to be perfect.