The Effectiveness of Interest Rate Liberalization

Abstract

By building, calibration and simulating a DSGE model, we explain, analysis and predict the macro-economy and economic structure outcomes and fiscal policy effects of interest rate liberalization in China. The steady-state equation, impulse responses and numerical simulation show that higher real deposit rate and capitals marginal cost will suppress investment and capital growth, increasing the household and government consumption ratio in GDP, which improve the economic structure and promote sustainable development; increasing interest rates can decrease fluctuation of output and inflation but increase fluctuation of nominal interest rates facing with technological shocks, monetary policy shocks and fiscal policy shocks; increasing interest rates will have a more crowding out effect when facing government consumption shock; however, the improvement of the economic structure will enhance the positive effect on the output.