The Empirical Research On The Relation Between Interest Rate And Prices Changes Based On DSGE Model

How will prices change when interest rate changes?This is a very meaningful and controversial issue.For clarifying the mechanism of interest rate’s influence on the price level and providing theoretical basis and empirical experience for the central bank to formulate monetary policy for macroeconomic regulatory,the paper firstly review the classical theory and research results of the domestic and foreign scholars,the paper analyzed the mechanism of the cost channel specifically and used appropriate econometric methods and set up microeconomic theory model for the empirical analysis.This article uses LR statics based on residual modification and rolling Granger causality test to explore the relationship between interest rates and inflation using monthly data from 1996-2015.The results showed that China’s interest rate is Granger cause of inflation and they generally keep a negative but weak relationship except for the time from 2006 to 2009.However,the relationship may turn positive when there is an economic downturn.The effect of the cost channel is asymmetry,which in the economic downturn is more significant than in the boom.By expanding the model framework of Christiano et al.(2005),The paper constructs a New Keynesian DSGE model embodying the cost channel of monetary policy transmission and incomplete interest rate pass-through to explore the effects of RMB interest rate on prices more accurately.Based on quarterly data from 1996 to 2015,we test the existence of the cost channel of monetary policy transmission in China using Bayesian estimation method empirically.The results showed that the interest rate changes make the positive change of the prices in the short run,but reverse changes in prices in the long term.Specifically,financial costs of firms are an important factor for price changes.A monetary contraction can increase the enterprise cost of capital in the short run which pushing up prices,however prices decline as aggregate demand side effects dominate the aggregate supply side effects in the long run.Those results are important for the central bank to make monetary policy.The central bank in the future should be more prudent when making monetary policy and attention should be paid to the influence of the policy in the short and long term.The central bank grasp the adjustment efforts when adjusting interest rates to avoid economic fluctions.