| Interest rates transmission mechanism is a process effecting the whole national economy, which reflects the way that monetary policy regulate interest rate, and how other economic variables, such as consuming and investment, had been caused through it. Since the 90s of the 20th century, with the world's financial deregulation relaxed and financial innovation accelerated, it has been more difficult in the money supply indicators' definition, statistics and monitoring, and it has been weakened continuously in the relationship of macroeconomic variables between money supply, national income and prices. Therefore, many western countries turned their monetary policy framework into interest rate-driven, which means that interest rate becomes the main channel of monetary policy transmission in these countries. As far as Chinese conditions, it has great theoretical and practical significance to carry out research of interest rate transmission mechanism in China in such a domestic and international environment of the interest rate market reforming deepened and the status of the interest rate transmission mechanism gradually improved.In this dissertation, it has firstly introduced the theory of the interest rate transmission mechanism and its usage in the major developed countries. And it has reviewed the history of regulation since the founding of PRC. As we know that the interest rate perspective in major developed countries are carried out monetary policy by the central bank to guide changes in benchmark interest rates which will lead changes in the whole interest rate system. So that it can effect investment, consumption and other behaviours for achieving effective transmission of monetary policy. In China, it has the regulation system as the above as well as direct regulation of adjusting deposit and loan interest rate in the existing financial institutions by China central bank. So the interest rate transmission mechanism is Dual-Track in China.Secondly, this paper reviewed the main theory of market-based rates, carried out Chinese process, and summary and analysis our country's current system and its characteristics because the development of interest rate transmission mechanism depends on the degree of its marketization. At present, China's interest rate in the call market, the inter-bank bond market, and bill market has been basically realized marketization. However, it still needs gradual promotion at deposit and loan rates in financial institutions. Thus the current interest rates in China shows resisting the coexistence of control and market which has increased complexity in the interest rate transmission mechanism.Thirdly, this dissertation has studied deeply on transmission effect in China's benchmark interest rate because it has played a prominent role in the transmission mechanism as the practice in major developed countries. And Research suggests that the benchmark interest rate movements can affect the credit market interest rates on the condition of total free interest rate market, thereby achieving effective transmission of monetary policy. While on the parallel case of the control interest rates and market interest rates, the interest rate transmission mechanism in most cases is invalid because monetary policy can only effect a limited region on currency demand curve. In order to demonstrate the results of theoretical research, this paper implement an empirical study on the benchmark interest rate transmission effect. From the empirical results, the current operations in open market in China has a more significant role in guiding major market benchmark interest rate which is not significant on other interest rates transmission effect, which is consistent with theoretical results. In addition, the paper notes the market as an example, empirically analysing the conduction effect of the benchmark interest rate to the real economy through the bill market, which shows that monetary policy intentions of the central bank can be transmitted to the real economy when it targets the benchmark interest rate as a monetary policy operations.Fourthly, in view of the special case that the interest rate reform has not been completed and it has coexist in control interest rates and market interest rates, this paper has constructed a VEC system containing control interest rates and market interest rates which has comparatively analysed the three areas of investment, consumption, output and prices affected by control interest rates and market interest rates respectively through empirical research methods of co-integration test, Granger causality test, impulse response analysis, variance decomposition. The results show that control the transmission rate and market interest rate effect is both not significant as well as there is some situations that is contrary to theory, such as increasing market interest rates will push accelerating spending growth and increasing control interest rates will push prices to go higher, etc. The study also shows that there are some differences in the conduction effect in control interest rates and market interest rates, which means that the former rates is greater than the later rates in a relatively short time after the interest rate adjustments from the time of conduction effect, on the other hand, from the factors that influence adjusting interest rates changing price level will lead to adjust control interest rates by central bank, therefore China's central bank has followed the "inflation targeting"to some extent on interest rates of deposit and loans in financial institutions, at the same time, investment, consumption, total output and price level changes have not led to change market interest rates in China, reflecting that the main goal of open market operations by China's central bank remains adjusting the liquidity of the market rather than market interest rates at present.Fifthly, based on the previous conclusions, it has analysed the constraints of transmission effects that influence interest rate transmission Mechanism, which shows that there are several factors constraining interest rate transmission mechanism which are the impact of interest rate controls, the lower sensitivity of the main micro-economic subjects about interest rate, the impact of pursuing profits on the behaviour of commercial bank, the impact of imperfect aspects in financial market development .In the end, Based on the foregoing conclusions, it has put forward some policy recommendations: First, to accelerate market-oriented interest rate reform; second, to continuously improve the sensitivity of interest rate in the real economy; Third, to accelerate the development of financial markets; fourth, to improve policy operation independence in central bank's monetary policy.
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