Research On The Transmission Mechanism Of Mid-term Lending Facility To Market Interest Rate

China has been continuously accelerating the marketization of interest rates since 2010,and the overall liquidity environment has been improved as well.However,the problem of total excess and structural shortage still remains.In order to make up for the structural liquidity gap,and encourage commercial banks to reduce the financing cost of the real economy,People's Bank of China began to use an optimal combination of 'Reverse Repurchase,targeted Required Reserve Ratio cuts and loan facilitation tools' to innovate monetary policy.The Medium-term Lending Facility(MLF)is emphasized as a medium-term policy interest rate to dredge the monetary policy transmission mechanism.The interest rate represents the price of funds and compensation of risks.The risks mainly include credit risk,liquidity risk and term risk.The risk structure theory of interest rates holds that the difference in bond interest rates with the same expiration time is determined by factors such as liquidity risk,credit risk and income tax policy.The term structure theory of interest rates believes that the difference in yields of bonds with different maturities represents the market's estimate of term risk and term premium.Therefore,this paper will theoretically analyze how China's MLF influence the market interest rate by regulating liquidity risk premium,credit risk premium and term premium,then empirically test the hypothesis through VAR model,and explore the optimal interest rate regulation mechanism.This paper chooses the sample interval from January 2015 to June 2019 and the results of empirical test show that the guiding effect of price-based tools began to outpace the quantitative tools,and the transmission mechanism of interest rate has become much smoother.The liquidity delivery and interest rate adjustment of MLF plays an important role in guiding and regulating the medium and long-term market interest rates.As a medium-term policy variable,MLF has distinct effects on different market interest rates.(1)The short-term liquidity premium is affected more by the reverse repurchase operation than MLF;MLF delivers a longer-term liquidity which doesn't impact short-term liquidity significantly;the 3-month MLF interest rate used as the short-term price-based monetary policy instrument is effective;the currently frequently used one-year MLF as a medium-term and long-term liquidity delivery tool has a significant impact on the liquidity premium.(2)Credit premium is affected by reverse repurchase significantly;MLF operation has a significant effect on credit risk premium at the beginning,but the effect gradually weakens;3-month MLF interest rate has a strong hysteresis effect on credit risk premium;6-month MLF interest rate provides medium-term and long-term funds,so the effect on the credit risk premium is more significant,but there are still two periods of lag;the one-year MLF interest rate has a weaker impact on the credit risk premium.(3)Reverse Repurchase and MLF launch will pull up the term premium in the short term;the impact of 3-month MLF interest rate on term risk premium is consistent with the policy intention;the 6-month MLF interest rate provides medium and long-term funds,theoretically it should be more effective against the term premium,but the empirical results show that the effectiveness of this price-based monetary policy transmission is not high;the one-year MLF interest rate has a significant impact on the long-term maturity premium.(4)According to the variance decomposition results of each risk premium,the 3-month MLF operating rate has the greatest impact on the liquidity premium change,followed by the 6-month MLF operating rate;the response of credit risk premium to each monetary policy tool has a lag of two periods,in which the reverse repurchase operation contributed the most to the credit risk premium change,followed by the 6-month MLF operating rate;the MLF net delivery contributed the most to the term premium change,followed by the 1-year MLF interest rate.Based on theoretical and empirical results,this paper puts forward the following policy recommendations.(1)Strengthen the guidance of MLF on medium and long-term interest rates,diversify the term variety of MLF.(2)Optimize the combination of monetary policy tools to improve the accuracy of liquidity delivery.(3)Appropriately use policy interest rate regulation to achieve a balance between"quantity" and "price".(4)Extend the guiding effect of MLF on loan interest rates and strengthen the supervision of commercial banks.