Asymmetric Adjustment of Interest Rate Pass-Through from Central Bank’s Policy Rate to the Market Rate: Evidence from China

Abstract

The paper investigates from the policy rate to the market rates under the interest rate marketization of the People’s Bank of China (PBC) since 2014. The focus is on the pass-through of the PBC’s policy target rates pass-through to the market rates. Empirical results, on the daily basis of an error-correction model suggest that the long-run pass-through of the policy target rates pass-through to the interbank market rates are all significant. The pass-through of the policy target rates DR007 and Shibor07 to the market rates which are 7-day interbank pledged repo rate (R007) and 7-day interbank offered rate (Chibor07) are both complete and in a very short period of time. The results confirm that DR007 as the PBC’s policy target rate takes an important role in the Chinese interest rate pass-though.