Empirical Analysis About The Influence Of Central Bank’s Repo Rate On Market Interest Rate

Repo is an important open market operation. In the United States and Europe, repo is the most commonly used monetary policy. And the repo rate is regarded as the key monetary policy rate. In China, central bank began repo operation in year 2000. The counterparty are 40 commercial banks selected by central bank according to relational rule. In the beginning, central bank use both repurchase and reverse repurchase. From the year 2004, central pause the reverse repurchase until the year 2012.Since central bank’s restarting reverse repurchase, more frequent operation causes people’s focus to repo. Is repo operation effective? Whether repo rate can guide the market interest rate or not? Can repo rate put influence on the long-term interest rate through short-term rate? Studying these problems, we can check the effect of central bank’s repo operation, understand the transmission mechanism of repo rate. It is good for policy maker to improve monetary policy in the future.The main content of this paper is the impact of central bank repo market interest rates.We firstly collect the literature internal and external of our country about central bank’s repo rate affecting market interest rates, to clarify the definition, usage and experience of the central bank repurchase. Then we describe the theoretical model about how central bank’s repo rate can affect short-term money market interest rates and the term structure. Our sample period is from January of 2002 to March of 2015. Empirical studies of the impact of central bank repo rate on market interest rate is divided into two parts: in the first part we investigate if the central bank’ repo rate significantly affect short-term interest rates of the interbank money market using a polynomial distributed lag model, and expressed the repo rate to rise or fall with dummies regression, we conclude that the passing-through from repo rate to the interbank currency market is relatively effective, but still lags and asymmetries. In the second part, we firstly use principal component analysis to extract three factors of the term structure, level, slope and curvature, then we conduct a series of data sequences stationary test, cointegration test and Granger causality test, VAR model, impulse response analysis and error correction model, and ultimately concluded that there is a long-term equilibrium relationship between the central bank repo rate and three factors of term structure. The central bank’s repo rate has a significant impact on the term structural factors.