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China’s interest rate pass-through after the interest rate liberalization: Evidence from a nonlinear autoregressive distributed lag model

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  • Li, Xiao-Lin
  • Si, Deng-Kui
  • Ge, Xinyu

Abstract

This study examines the interest rate pass-through (IRPT) mechanism in China after the interest rate liberalization by using the nonlinear ARDL (NARDL) model proposed by Shin et al. (2014). In order to dissect the IRPT of China appropriately, the interest rate transmission is divided into three stages in which changes in the policy rate are first transmitted to the target market rate and in turn, to the other interbank market rates and treasury bond rates, and eventually to the bank retail rates and corporate bond rates. The empirical results show that though changes in the monetary policy rate can be completely transmitted to the policy target market rate, they appear to be passed on to the other interbank market rates excessively and to the bank lending rates incompletely. Moreover, the pass-through from the policy target rate to the bond market rates is in general more sufficient than the pass-through to the bank retail rates. In addition, the patterns of asymmetry can be identified for the pass-through in the second and third stages, with the impact of positive shocks on the policy target rate being more pronounced than that of negative shocks either in the short or long run. These findings suggest that the interest rate transmission after the interest rate liberalization in China is far from being as effective as expected, and policy rate cuts might not have desirable effects on the real economy in the context of the recession.

Suggested Citation

  • Li, Xiao-Lin & Si, Deng-Kui & Ge, Xinyu, 2021. "China’s interest rate pass-through after the interest rate liberalization: Evidence from a nonlinear autoregressive distributed lag model," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 257-274.
    • Handle: RePEc:eee:reveco:v:73:y:2021:i:c:p:257-274
    DOI: 10.1016/j.iref.2020.12.031
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    3. Jing Yuan & Yan Peng & Zongwu Cai & Zhengyi Zhang, 2022. "A Quantitative Evaluation of Interest Rate Liberalization Reform in China," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202214, University of Kansas, Department of Economics.
    4. N. P. Pil’nik & S. A. Radionov, 2022. "Forecasting Interest Rates and Maturity Indicators in the Russian Banking System," Studies on Russian Economic Development, Springer, vol. 33(3), pages 344-352, June.

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    More about this item

    Keywords

    Interest rate pass-through; Asymmetric adjustment; Nonlinear ARDL model; Interest rate liberalization;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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