The interest rate transmission mechanism and transmission efficiency of monetary policy in China: empirical analysis based on TVP-SV-VAR model

Abstract

Our theoretical model sets money market short-term interest rate as policy rate and reveals the mechanism of policy rate transmission to bond market interest rate and credit market interest rate. We apply the TVP-SV-VAR model to examine changes in transmission efficiency during these processes. We find that after central bank deregulated interest rates, the transmission efficiency of monetary policy interest rates increased significantly. The transmission of short-term interest rates to risk-free rates is the most efficient, followed by the transmission to long-term interest rates, but the transmission efficiency to loan rates is not ideal. In long sample period, the transmission of financial market benchmark interest rate SHIBOR007 to other interest rates is more desirable than IBO007 and R007. In short sample period, transmission of DR007 changes to interest rate changes in other markets is similar to SHIBOR007, indicating that using DR007 as central bank’s policy target is highly feasible.