A Study On The Correlations Between Benchmark Interest Rate And Goals Of Monetary Policy In China

People’s Bank of China(PBOC)eliminated ceilings on deposit rates in October 2015,implying that the interest rate marketization reform in China has been almost completed by now.Besides,PBOC has built a benchmark interest rate system consisting of Shibor,LPR and the yield curve of treasury notes on behalf of money markets,bond markets as well as credit markets,and used a variety of instruments such as SLF to promote the interest rate corridor.All these steps show that the monetary policy in China is transiting from quantity regulation to price regulation,which meets the requirement mentioned in the 13th Five Year Plan.This paper mainly studies the correlations between the benchmark interest rate and the goals of monetary policy.Thus,firstly,this paper explains the history of interest rate marketization reform as well as the formation mechanism of the benchmark interest rate in China,and then analyzes the feasibility of choosing interest rates as the intermediate goal.Secondly,this paper makes detailed analysis about the interest rate transmission mechanism from operational goals to intermediate goals,and finally to ultimate goals of monetary policy.Besides,the first part of the interest rate transmission mechanism is further divided into 2 steps:from the central bank to money markets and from money markets to capital markets.Thirdly,this paper examines the correlations between Shibor and economic growth indicators(such as GDP,investment,consumption and export),as well as price stability indicators(such as CPI).The empirical process mainly involves Johansen cointegration test,Granger causality test and impulse response function.The empirical results show that although there is Granger causality between these indicators,the impulse response paths are not significant,which means the interest rate transmission mechanism from PBOC to the real economy does exist,but not sufficiently effective.In conclusion,this paper thinks that although in theory the interest rate transmission mechanism does exist in China,its effects are restricted in reality since the correlations between benchmark interest rate indicators and macroeconomic indicators are not significant enough.Therefore,when implementing monetary policy,PBOC should use both quantity tools and price tools.Besides,in the future,PBOC should further deepen the financial mechanism reform,establish a sound benchmark interest rate system and accelerate the development of a multilevel financial market.