Co-movement Of Interest Rate Expectations Between China And Us Money Markets

After the financial crisis, forward guidance, as a representative of new monetary policy tools monetary policy is getting to be concerned by central banks around the world. Forward guidance is a kind of policy tools for the central bank to carry out monetary policy and expectation management. Market participants and the central bank would form a consensus expectation, which can reduce the cost of monetary policy implementation and improve policy effectiveness by effective expectation management. China’s central economic work conference held in 2015 pointed out that the implementation of macroeconomic regulation and control should be conducted by paying more attention to guide market behavior and social expectations. Recently, the monetary policy of China is transforming from "quantitative" monetary policy to "price" monetary policy, interest rates is becoming the most important intermediate target of monetary policy. How to guide the behavior of market participants and enhance the validity and effectiveness of monetary policy by interest rate expectations management has been the important research topic in theory and practice. Especially under the background of the world financial integration and the interest rate liberalization in China, it is significant to conduct researches on expectations management of central banks and comovement between different money markets interest rate expectations.This paper discusses the guiding effect of central bank on monetary market interest rate expectations and the time-varying correlation between China and US money market interest rate expectations. First, we analysis China and United States central bank’s guiding impacts of the interest rate expectations to improve the interest rate expectation management of our central bank. Second, we analyze time-varying correlations between the interest rate expectations in China and US. Different from previous research, the sample of this paper is interest rate swaps prices which includes market participants’ interest rate expectations. Since two groups serials have different order stationary, we use the Ensemble Empirical Mode Decomposition algorithm which can be used for analyzing non-linear and non-stationary financial time series data and reducing the information loss in contrast with traditional quantitative methods. In addition, we use the time-dependent intrinsic correlation, based on the Ensemble Empirical Mode Decomposition algorithm to analyze the time-varying correlations among these expectations. Time-dependent intrinsic correlation can calculate the time-varying correlation coefficient between the two groups of sequences through the way of "sliding window", which is helpful to examine the local information and local characteristics of the time-varying correlations among interest rate expectations.The results are as follows. First, central banks of two countries have significant leading impacts on market interest rate expectations, monetary policy intentions can be well delivered to market participants, except for the long term expectation in China. Second, the correlation between these interest rate expectations is weakening with the expectation period, and the correlation between short-term expectations is volatile. Third, the dominant impact of US money market interest rate expectations on China money market expectations is decreasing with time, and sometimes is disappear. Fourth, in the short term, the United States money market is in a dominant position compared to China money market. The change of China money market interest rate expectations lags behind the changes of US money market expectations. In the long term, the comovement between two countries’ interest rate expectations is not obvious. Our results shows that China money market is vulnerable to international economic fluctuation in the short run, but in the long run, it is still mainly affected by macroeconomic development and monetary policy in China. In a word, these results will help the central bank to effectively guide money market interest rate expectations, enhance the effectiveness of monetary policy, stabilize economic fluctuations and ultimately promote financial stability and economic development.