Abstract
In August 2019, People's Bank of China launched the reform of Loan Prime Rate (LPR) quotation formation mechanism and then made continuous progress in the order of “new loans first, followed by exiting loans,” dredging the interest rate transmission channel of “policy interest rate, LPR, loan interest rate.” In 2020, Chinese financial institutions have mainly referred to LPR pricing for loans, and the marketization level of loan pricing has significantly improved. This paper analyzed the policy effects transmitted by LPR through constructing a Dynamic Stochastic General Equilibrium (DSGE) decision model, and it was found that the financial market structure, pricing ability of commercial banks, and the degree of LPR application all affected the policy rate transmission effect and had an impulse impact on macroeconomic growth. Based on the above analysis, this paper proposed policy suggestions on the path of interest rate market-oriented reform and coping measures of commercial banks in China.
Highlights
Empirical studies on Dynamic Stochastic General Equilibrium (DSGE) models based on open economy done by Meinusch and Tillmann [11] and Ge [12] manifest that the transmission efficiency of price monetary policy shows a significant improvement trend during the sample period, while the macrocontrol effect of quantitative monetary policy is gradually weakening
It can be divided into the following scenarios: (i) Loan Prime Rate (LPR) pricing mechanism loans account for 50% of the existing loans; (ii) LPR pricing mechanism loans account for 80% of the existing loans; (iii) LPR pricing mechanism loans account for 100% of the existing loans. is paper takes the weighted average interest rate of one-year loan, the interest rate of one-year time deposit, and the yield of one-year treasury bond as observation variables
We assume that there are no other changes in policy constraints. e model results showed that when the policy rate decreased by 35 BP, the loan interest rate, deposit interest rate, and government bond interest rate declined by 21 BP, 15 BP, and 26 BP. is indicates that when LPR pricing mechanism loans account for 50% of the existing loans, the transmission efficiencies of the policy rate to the loan interest rate, deposit interest rate, and government bond interest rate are 60%, 43%, and 74%, respectively (Figure 2)
Summary
In August 2019, the market-oriented reform of China’s interest rate was further deepened. Empirical studies on DSGE models based on open economy done by Meinusch and Tillmann [11] and Ge [12] manifest that the transmission efficiency of price monetary policy shows a significant improvement trend during the sample period, while the macrocontrol effect of quantitative monetary policy is gradually weakening. The constraints of China’s traditional credit system, as well as the state-owned nature and limited competition of commercial banks, can slow down the central bank’s interest rate policy transmission and cause efficiency losses Dong He and Honglin Wang [14] pointed out that, different from developed countries, China gradually formed a monetary policy framework with the dual interest rate system as the main feature in the market-oriented reform. The existing research results showed that, due to China’s monetary market structure with indirect financing as the main body, policy rate changes were mainly transmitted through bank credit. DSGE model including five subjects: government, residents, enterprises, central bank, and commercial banks to perspective dynamic changes of the regulation effect of LPR channel, in order to provide reference for improving the regulation of monetary policy
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