| Transmission mechanism of monetary policy has been a hot research issue, amature bond market will have an important effect on the formulation and transmissionof central bank’s monetary policy. As China’s bond market growing, discussing the roleof bond market in the transmission process of monetary policy will have an importantsignificance for the formulation of monetary policy and further improve the operatingmechanism of the bond market.Primarily monetary policy conduction through interest rate channel, exchange ratechannel, credit channel and asset price channel, and the conduction mechanism can bedivided into internal stage and external stage, which the former mainly refers to themonetary policy impact on financial markets, and the latter mainly refers to the changesfrom the financial markets to the real economy. Based on the two-phase conductionprocess, we describe monetary policy from three aspects which are interest rates, moneysupply and credit scale. In order to empirical test the effects of monetary policy on thebond market, inter-bank lending market average interest rate of seven days is selected asa representative of the variable interest rate, and based money supply, broad moneysupply as of the money supply variables, the loan amount as a representative of the sizeof credit variable, as well as bond prices is used to reflect the volatility of bond market,.Meanwhile, as proxy variables for the real economy, total retail sales of social consumergoods and investment in fixed assets are used to test the impact on the real economy.In the empirical research process, the econometric modeling methods is factoraugmented vector auto-regression (FAVAR) model. Based on the data from January2007to December2012, we extract factors from75macroeconomic variables toconstruct five vector auto-regression (VAR) models, and then use the impulse responseand variance decomposition to analysis the impulse response of bond’s price because ofchanges from interest rate, base money growth, broad money growth and loan growth,as well as the impulse response of consumption growth, investment growth for bond’sprices. It was found that rate, broad money growth, loan growth have some effects to theprice of bond, but not very significant. And the base money growth has no effect onbond’s price, indicating the interest rate channel, the credit channel is not very well totransmit monetary policy. The substitution effect, cost-effectiveness and expected effectis not obvious in this process. At the same time, we also found that the changes in bond’s price has more impact on money, showing the mainly role of China’s bondmarket is a tool to adjust the money through open market operations. In the externalprocess, the effect of bond’s price is also not very obvious to consumption growth andinvestment growth, indicating the asset price channel is not significant, as well as thewealth effect and the asset allocation function of bond market is not obvious. Overall,China’s bond market in the monetary policy transmission process has not play its duerole, which mainly because of not fully market-oriented interest rate, the marketstructure is not quite rational, the market system is not perfect, insufficient marketliquidity and slowly response to monetary policy. And finally we give some points toimprove bond market liquidity and to promote market integration interconnection.The main innovation of this paper is the model selection. In order to overcome thelack of information in the VAR model, this paper use the FAVAR model combineddimensionality reduction and VAR, which includes75macroeconomic variables, andwill be more comprehensive and accurate response of monetary policy conductioneffect on the bond market. But at the same time, because of a lack of a certain standardin the macroeconomic variables selected, thus there may be many inadequacies in thispaper with a certain degree of subjectivity. |
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