The Effectiveness Of Interest Rate Liberalization To Monetary Policy Validity

Economic globalization and financial liberalization has become the main factorsthat influence the world economy since1970s central banks of many countries havechanged the intermediary target of monetary policy from quantitative to prices in orderto meet the needs of economic and financial development. The transmission mechanismof monetary policy plays an important role in the monetary policy, it is not only relatesto how monetary policy affects the real economy, but also determines the effect ofmonetary policy. After nearly20years of efforts, China’s market-oriented interest ratereform has obtained the remarkable result,and the interest rate pricing mechanism whichis determined market capital supply and demand has been constantly perfected. Toanalyze the effects of interest rate liberalization is essential to the macroeconomicpolicy formulation,for difference of interest rate formation mechanism has differentaffects on important economic variables.If the monetary policy has not been adjusted intime,the effect of macroeconomic regulation and control will suffer severe impact.Based on monetary policy framework as the starting point, this paper explains themeaning of the effectiveness of monetary policy, and introduces the measure ofeffectiveness of monetary policy as well as the factors affecting the effectiveness ofmonetary policy. Secondly, this article analyzes the effects of marketization of interestrate’s on the effectiveness of monetary policy from the point of view of theoretical andempirical,and the analysis shows that degree of marketization of interest rate caneffectively improve the effectiveness of monetary policy by comparative study. Mainlymethod used in this paper is the combination of qualitative analysis and quantitativeanalysis method, the qualitative analysis make it clear that the interest rate marketizationpath and mechanism of the impact of monetary policy effectiveness, and theeconometric methods-constructing a VAR model to analyze the relationship betweenvariables-is used to make quantitative analysis. The innovation of this article is fromthe perspective of theoretical and empirical analysis to analyse the effects ofmarketization of interest rate’s on the effectiveness of monetary policy.On one hand,thispaper studys influence of interest rate changes on real output,on the other hand, theinfluence of interest rate changes on monetary channel and credit channel of monetarypolicy transmission has also been studied. The shortcomings of this article is not fromthe perspective of dynamic to study the effects of marketization of interest rate’s on themonetary policy tools, monetary policy transmission channels and the monetary policyobjectives.This paper argues that in the long term and short term interest rate liberalizationwill improve the effectiveness of monetary policy,so the reform of interest ratemarketization process should be determined to push forward. The market-orientedreform of interest rate marketization and economy is synchronous, as the economicmarketization degree of deepening, interest rates will be an important intermediary goalof macroeconomic regulation and control.Improving the sensitivity of importanteconomic variables forthe interest rate and enhancing the interest rate transmissionchannels are important to improve the effectiveness of monetary policy,so some suggestions should be put to improve the effectiveness of the interest rate transmissionchannels, such as adjusting the industrial structure,establishing modern enterprisesystem,improving the stock market.