Analysis Of The Time-varying Impact Of Standing Lending Facility On Money Market Interest Rates

Interest rate marketization is one of the most core reforms in the economic and financial field.With the advancement of interest rate marketization,money market interest rates in Chinese market interest rate system start to play the role of "wind vane".At present,Standing Lending Facility is the main monetary policy tool of People’s Bank of China(PBC)to regulate and control money market interest rates,with the characteristics of both "quantity" and "price".It is necessary to analyze deeply that the regulatory effects of Standing Lending Facility on money market interest rates and whether it can guide money market interest rates effectively in the context of Covid-19.Based on the Time-varying Parameter VAR with Stochastic Volatility(SV-TVPVAR)model,this paper analyses the time-varying impact of Standing Lending Facility on money market interest rates using monthly data from February 2016 to December2022.The SV-TVP-VAR model overcomes the shortcomings of the traditional VAR model,which can effectively capture structural changes and other possible nonlinear features in the VAR system.The main research conclusions include:(1)The impact of Standing Lending Facility on money market interest rates has obvious time-variability,reflecting a certain pro-cyclicality.Among them,the time-variability of the current period impact is the most obvious.According to the trend,it can be roughly divided into four stages.The influence was weak before the first half of 2017.From the second half of 2017 to the first quarter of 2019,the positive impact was significant.The negative impact effect was significant from the second quarter of 2019 to the end of2020.From 2021 to the end of 2022,the positive impact was enhanced.It can attribute to the macroeconomic situation,the rational expectation of market entities to SLF interest rate and the increase in financing availability caused by the optimization of the operation process and the expansion of the scope of qualified collateral.(2)During the period of negative shocks,Standing Lending Facility has a significant "cooling" effect on money market interest rates,and shows more effect in local crises than in systemic crises.Since the outbreak of Covid-19,the impact of Standing Lending Facility on money market interest rates has gradually changed from the initial negative impact to the positive impact.(3)The impact of the operating rate of Standing Lending Facility on the money market interest rate may be intermittent,that is,the money market interest rate is indirectly impacted by the volume of SLF during the operation rate adjustment period.An unexpected or substantial adjustment of the operating interest rate may be effective.(4)The impact of Standing Lending Facility on different money market interest rates is different.The Repo(R)Rate is more sensitive than the DepositoryInstitutions Repo(DR)Rate.The policy significance of this paper is that it pays attention to the time-varying impact of Standing Lending Facility on money market interest rates,especially in the context of negative shocks,and emphasizes the liquidity risk prevention and control of central bank.Also,the reasonableness of the DR rate as a target rate for Standing Lending Facility was discussed.The policy suggestions include the following four aspects:(1)The use of Standing Lending Facility needs to be adjusted according to the macroeconomic situation.(2)Further promote the reform of the interest rate market,further cultivate and improve the benchmark interest rate system.(3)Continue promoting the reform of the operation mode of Standing Lending Facility and improve the efficiency of monetary policy implementation.(4)Strengthen the prevention and control of liquidity risks and firmly ensure that no systemic risks arise.