The Effects Of Central Bank Open Market Repo Operations On Money Market Benchmark Interest Rate

The overall goal of interest rate marketization is to establish and per fect the interest rate formation mechanism is determined by market supply and demand. The central bank guides and regulates the market interest rate through the use of monetary policy tools, financial institutions determine the price of the assets and liabilities system according to market interest rates. In recent years, influenced by various macroeconomic factors, China’s monetary market interest rate volatility often appear, makes the financial institutions face the sudden increase of interest rate risk, and it is not conducive to the stable operation of the financial market. This requires the central Banks effectively use various monetary policy tools to help ease monetary market interest rate fluctuations, guide the formation of the monetary market benchmark interest rate. China’s central bank’s monetary policy is given priority to quantitative control, but with the advancement of interest rate marketization, open market operations of price regulation has gradually become an important tool of the central Bank to control money market interest rates and guide the benchmark interest rate.Firstly, according to the quantities of money market benchmark interest rate, this paper selects three major interest rates in money market, and use Granger causality and EGARCH model to choose the suitable one. The empirical results show that REPOR is the best benchmark interest rate, especially the overnight rate.Secondly, based on the chosen benchmark interest rate, this paper analyses the affect between REPO operations and REPOR. The Granger causality shows that the two has one-way affect relationship. And the co-integration test proved the existence of a long-term stable equilibrium between the two relationships. A further error correction model indicates that a greater impact long term interest rates on repo operations market liquidity tightness. And because of its error correction coefficient is negative, this error correction mechanism allows the central bank benchmark interest rate and the repo operations to maintain long-term stable equilibrium relationship. In the seven days repo restore the balance faster, but in the 91 repo repurchase recovery faster.Finally, this paper empirical results, points out the shortcomings of the existing open market operations and money market benchmark interest rate construction, we proposed to strengthen the construction of the benchmark interest rate, open market operations and improve the bond market and other relevant policy recommendations.