Can Interest Rate Corridors Stabilize Short-term Market Interest Rates?

Continuously deepening the reform of RMB interest rate marketization is the key task of China's financial field for a long time now and in the future.When the price signal function of interest rate markets fails,a series of issues should be considered seriously by monetary authorities,including whether to intervene,when to intervene,how to intervene,how to determine the degree of intervention,and how to stabilize market expectations after intervention.These issues are crucial to China and many other countries.To solve these problems,the interest rate corridor(IRC)system is adopted as a major measure by some central banks.Despite the fact that China has actually launched the construction of IRC since 2015,Chinese scholars still have a lot of controversy on whether a corridor system should be established at present,the essence of which lies in whether IRC is effective.In view of the condition that the medium and long term interest rate markets have been relatively stable,while huge fluctuations in short-term interest rates occur frequently,which will not only induce systemic financial risk,but also damage the healthy operation of the real economy,this paper mainly analyzes whether IRC can effectively stabilize the short-term interest rate market.Based on a literature review,this paper firstly expounds the mechanism of IRC through the principle of money supply and demand curve with a static equilibrium model of short-term interest rate determination under asymmetric information condition;afterwards,the paper combs the experience and lessons from the practice of the United States,India and Turkey and other countries;and then,on the basis of a CKLS-GARCH model,the paper tests the effect of IRC on short-term interest rate volatility in abnormal economic fluctuations and in emerging economies respectively;at the end of the paper,this paper puts forward some concrete suggestions for China to improve the IRC system.The main findings are as follows.(1)IRC is the automatic stabilizer of short-term market interest rates,which can effectively reduce short-term interest rates volatility even under the condition of abnormal economic fluctuations.(2)In order to promote the effect of the IRC,emerging economies should choose reasonable instruments of target interest rate,make moderate IRC's width,enhance the marketization degree of price-based monetary policy instruments such as interest rates and exchange rates,guarantee relative independence of the central bank,as well as dredge the transmission mechanism of monetary policy.It is suggested that in the near term,China should actively promote a set of monetary policy operating system which takes IRC as the main tool and open market operations as a supplement.And key measures include:(1)enhancing the marketization degree of RMB price-based instruments in China's monetary policy framework,(2)breaking the segmentation of the money markets,(3)cultivating the target interest rate of the central bank's macro-control,and(4)dredging the transmission channels of monetary policy.