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A Quantitative Evaluation of Interest Rate Liberalization Reform in China

Author

Listed:
  • Jing Yuan

    (School of Statistics, Shandong Technology and Business University)

  • Yan Peng

    (School of Statistics, Shandong Technology and Business University)

  • Tsun Zongwu Cai

    (Department of Economics, University of Kansas)

  • Zhengyi Zhang

    (International School of Economics and Management, Capital University of Economics and Business)

Abstract

Based on the characteristics of monetary policy and term structure of bond yields, this paper proposes an interest rate model to evaluate the consequences of interest rate liberalization in China. Our empirical results show that benchmark interest rates and expected inflation are strongly correlated, although the relationship between expected inflation and market interest rates of all terms is relatively weak. Additionally, our model provides a superior goodness-of-fit over the predicted mean, the variance and the correlations of treasury bond yields, and the inflation estimated from the proposed model demonstrates more preferable forecasting accuracy by outperforming the results estimated from either Langrun or Baidu CPI index. Our findings suggest that adjustment of benchmark rates and reserve requirement are the most important price-based tools for the central bank to transmit the effects of monetary policy along the yield curve. The development of interest rate liberalization further requires prudential managements by the central bank to focus on short-term interest rate intervention besides policy support, in emphasizing the power of market forces to eventually link the change in market interest rates with economic fundamentals.

Suggested Citation

  • Jing Yuan & Yan Peng & Tsun Zongwu Cai & Zhengyi Zhang, 2022. "A Quantitative Evaluation of Interest Rate Liberalization Reform in China," Annals of Economics and Finance, Society for AEF, vol. 23(2), pages 197-221, November.
  • Handle: RePEc:cuf:journl:y:2022:v:23:i:2:yuan:peng:cai:zhang
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    References listed on IDEAS

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    More about this item

    Keywords

    Economic fundamentals; Expected inflation rate; Interest rate term structure; Interest rate liberalization reform;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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