The Decoupling Of Short And Long Interest Rates,International Correlations And Common Factor

Since entering 21 centuries,the decoupling of China's short and long interest rates which can not be explained with general theories has been appearing for several times.Long interest rate is insensitive to short rate,even appears decoupling.This phenomenon reflects the fact that long interest rate and short interest rate are effected by different factors.Short interest rate is commonly thought to be effected by domestic economy and monetary policy,while long interest rate is effected not only by domestic factors,but also by international factors.Thus,their trends are inconsistent.Many researchers think the variation of long rate is effected by a international common factor,and the inner of this factor is global imbalance.We start our research with the decoupling of interest rates and employ Uniform Spacings mythology to document interest rates of 46 economies,including China.We find that the international correlations of long interest rate are higher than that of short interest rate and strengthening with the time.The correlations of all kinds of economies are highly significant most of periods,which implies that we can use a model containing common factor to describe interest rates among counties.The result of Panel Analysis of Non-Stationary in Idiosyncratic and Common components test(PANIC)confirms the presence of the decoupling of short and long interest rates.The term premiums of developed economies have common factor and its effectiveness on long rate is larger than that on short rate.However,for developing economies,the effectiveness of common factor on short rate is larger than that on long rate.During financial crisis,the effectiveness of common factor is increasing,thus reflects more information about interest rate changing.Generally,common factor explains the variation of long rate better than short rate and explains the variation of term premium better than interest rate levels.We then choose 8 alternative international indicators including CPI of advances economies,international reserves of advances economies and so on according global imbalance theory to do the panel cointegration test with long interest rate.The result shows world's CPI is determinant of common factor in 2002-2007.International reserves of developing economies and industrial production index are determinants of common factor industrial production index in 2007-2009.Industrial production index are determinants of common factor industrial production index in 2010-2016.CPI of developing economies is determinant of common factor in entire period.Thus,international CPI theory is established in pre-financial crisis period and entire period.Industrial production index becomes the determinant of common factor of long interest rate in recent period,because 2008 finance crisis made long interest rate become more sensitive to real economic trend and business cycle.The saving glut theory only has a little effectiveness in 2007-2009.Finally,we put forward several proposals:constructing monetary policy transnational transmission indicator and common factor influencing indicator to provide reference and effect estimation for central bank setting monetary policy;constructing industrial production of advanced countries influencing indicator for long interest rate and making full use of controlling inflation to affect global long interest rate;formulating strategy for financial crisis according effectiveness of common factor in financial crisis period,thus can reduce the volatility of domestic finance when meet the similar crisis again;deepening financial opening up and accelerating the process of RMB internationalization.