Interest Rate Liberalization Research Articles

The construction of ShanghaI Pilot Free Trade Zone and the interest rate liberalization in China

It is of practical significance to study how to fully play the promoting effect of Shanghai Free Trade Zone (SFTZ) on China’s marketization of interest rate after setting up SFTZ. In terms of interest parity theory, this article tries to divide the process of China’s marketization of interest rate into different stages and conduct in-depth study of the formation mechanism of interest rate of each stage from the perspective of capital flow. The results show that marketization of interest rate is a system project. It can be divided into three stages: official interest rate supplemented market, two-track system and integration, according to the progress of marketization of interest rate, and the formation mechanism of interest rate of each stage varies. Free trade zone is a domestic and international hub for capital flow. The condition of capital flow influences capital supply, thus affecting the formation mechanism of interest rate domestically in free trade zone and promoting the progress of China’s marketization of interest rate. Marketization of interest rate, capital account liberalization, internationalization of RMB, and construction of international financial center are the supplementary, inseparable and transitional process. Therefore, the promoting effect of SFTZ on the marketization of interest rate, the capital account liberalization, the internationalization of RMB and the construction of international financial center should be made full use of. Finally, on the basis of it, this study explores hardships that China’s marketization of interest rate faces after the foundation of SFTZ and puts forward corresponding policy suggestion.

Completing China's Interest Rate Liberalization

AbstractChina's recent removal of the last ceiling restriction on deposit rates in October 2015 is a milestone in interest rate liberalization, but not the end of it. International experience suggests that, without structural and quantitative reforms, simply freeing interest rates can result in major financial stress. Before China's central bank can completely relinquish implicit or explicit guidance for commercial banks' interest rate determination, it needs to accomplish two tasks: improvement of commercial banks' pricing capability as well as the monetary policy transmission mechanism. Both tasks require significant reform measures to be initiated, such as enforcing market discipline, forming a new monetary policy framework, developing money and capital markets, abandoning quantitative restrictions on credit and reforming the financial regulatory system.

Financial Development, Interest Rate Liberalization, and Macroeconomic Volatility

This article examines the relationship between financial development, interest rate liberalization, and macroeconomic volatility in fifty-six emerging and developed economies over the period 1980–2009. We find that financial development plays a significant role in dampening the volatility of macroeconomic growth rate, but up to a limit. The more the interest rate is liberalized, the more likely that financial development can stabilize the economy. Particularly, interest rate liberalization has a more positive influence on emerging and developing countries. Financial development and interest rate liberalization can also alleviate the influence of external shocks. They mutually enhance their functions as economic stabilizers.

Financial sector reforms and private investment in Malawi: an ARDL-bounds testing approach

This study attempts to examine the impact of financial sector reforms (proxied by interest rate liberalisation) on private investment in Malawi, using the ARDL bounds testing approach. The study is motivated by the conflicting results that have been reported in the literature in recent years on the efficacy of interest rate liberalisation in developing countries. The study seeks to answer one critical question: does interest rate liberalisation spur private investment in Malawi? The empirical results of this study reveal that interest rates have a positive and significant impact on private investment in the short-run, but not in the long-run. The study, therefore, recommends that interest rate reforms should be intensified in Malawi in the short-run. However, in the long-run, the monetary authorities should keep an eye on the interest rates, in order to ensure that they remain within the acceptable threshold.

Research on the Impact of Interest Rate Liberalization on the Profitability of China’s Listed Small and Medium Sized Commercial Banks

In 1996, The People's Bank of China (PBOC) established a national treasury bonds market and inter-bank lending market, marking that the official start of China’s interest rateliberalization. After 20 years of orderly developing, reform has entered the key stage. In October 23, 2015, the PBOC announced that it would no longer set the floating ceiling of deposit rate to commercial banks and rural cooperative financial institutions. Release the control of interest rate means that the entire banking industry will fall into a more intense competition, and the traditional mode of operation will suffer from more threats and challenges. Especially in China's small and mediumsized commercial banks, compared to the large state-owned banks, the capital accumulation is relatively weak, more limited business development, limited customer resources, lack of brand effect, so it is bound to face more difficulties.In empirical research, the article selects 11 listed small and mediumsized banks as the research samples, using panel data model to analyze how the interest rate liberalization impact the profitability of these selected banks. Finally, combining with analysis results, the article proposes some measures to increasing the profit space of small and mediumsized commercial banks under the process of interest rate liberalization.

Discussion on the Trend of China’s Commercial Banks Management: Based on the Influence of Financial Market Development

As the environment of commercial banks, the development of financial market has a profound impact on the commercial banks. In recent years, the continuous development of financial market is both an opportunity and a challenge for the commercial banking industry. This paper tries to analyze commercial bank business challenges brought about by the development of the financial market mainly from three aspects: the development of Internet banking rise, interest rates liberalization and deposit insurance system, financial industry mixed operation trend and takes it as a starting point to explore the trend of development of commercial bank management from the commercial bank organization structure, management mode and business development three aspects.

Term structure analysis based on a static model of inter-bank bond market

The term structure of interest rates has been a hot topic in the financial sector. With the accelerating process of interest rate liberalisation, to seek a representative benchmark interest rate of the market is basis for the fixed income products pricing. This paper using Nelson-Siegel-Svensson model and polynomial spline model fitting analysis is carried out on bond transaction data of inter-bank in China, through analysis and comparison of the two models, to choose the appropriate method to fit the term structure of interest rates.

A Comparative Empirical Study on the Macroeconomic Objectives and Effectiveness of Interest Rate Policies of China and U.S.

This paper summarizes the relevant literatures about the economic effects of interest rate policy and Taylor rules, on the basis of which macroeconomic objectives indicators of China’s and U.S.’s interest rate policies are come up with. Then the macro-economic objectives and effectiveness of their interest rate adjustment policies are studied through Granger causality test and multivariate co-integration regression model. The result shows: Firstly, both of China and U.S. take economic growth, price level and employment level into consideration when adjust the benchmark interest rates. China’s adjustment pays more attention to stable price level and promoting employment level, while U.S.’s adjustment focuses more on stimulating economic growth and promoting employment level. Secondly, compared with China, U.S.’s market-oriented interest rate adjustment mechanism is more effective to reflect and respond to changes in the macroeconomic situations. Thirdly, the effectiveness of U.S.’s adjustment is obviously superior to China’s. U.S.’s benchmark interest rate adjustment can significantly affect the economic growth and employment level, and price level to some extent as well; while China’s effectiveness is confined to price level. Therefore, China should accelerate the interest rate liberalization and learn from U.S. to reform the function mechanism of interest rate policy, so as to enhance the interest rate policy on the sensitivity and effectiveness of macro-economy.

Interest rate uncertainty, Investment and their relationship on different industries; Evidence from Jiangsu, China

The aim of this study is to investigate the impact of real interest rate on invest- ment level on different industries of Jiangsu, China over the period of 10 years from 2003 to 2012. The effect of interest rate on investment in different industries is tested by using static and dynamic panel-data model. The empirical evidences indicated that interest rate and investment are positively correlated. However, interest rate uncer- tainty has small impact on rate of investment in different industries. Industries like manufacturing, power, gas, and water industry, finance and real estate are more sensi- tive to interest rate fluctuation. Furthermore, evidence indicated that sensitivity of interest rate on investment is also low. It is suggested that government should accelerate the pace of interest rate liberalization and improve the sensitivity of investment to interest rate. The government should encourage rate sensitive industries in province.

Understanding the Influence of Interest Rate Liberalization on Economic Structure and Monetary Policy

In this paper, a dynamic stochastic general equilibrium model with price stickiness is constructed to analyze quantitatively the effect of interest rate liberalization on economic structure and monetary policy. Using parameter calibration and Bayes estimation, we analyze the impulse responses and numerical simulation of the external shocks of technology shocks and monetary policy shock. The empirical results find the following conclusion: Firstly, the interest rate liberalization is conducive to economic restructuring as the investment ratio and capital growth is suppressed and the household and government consumption ratio is promoted. Secondly, the interest rate liberalization can lower economic fluctuation, and enhance the defense ability against external shocks such as technological shocks and monetary policy shocks. Moreover, the interest rate liberalization is help to dredge the monetary policy transmission channels as the interest rate shocks on the real economy is gradually increased.

Shadow Banking: China's Dual-Track Interest Rate Liberalization

Shadow banking in China is mainly conducted by banks to evade the excessive credit control, which constitutes a dual-track approach to liberalize the country's rigid interest rate policy. The market track of shadow banking can lead to efficiency gain by allowing credit resale to fund the more productive yet credit-deprived private enterprises (PEs). Pareto improvement can be achieved as the banks and state owned enterprises (SOEs) participate in shadow banking and share the efficiency gain. Full interest rate liberalization may not lead to additional efficiency gain, as it magnifies the credit mis-allocation in favor of the less productive SOEs.

Interest Rates Liberalization or Economy Control: The Case of the Chinese Banking System

The Chinese Central Bank decided on June 8 and July 6, 2012, on the duplication and consecutive cut of the deposit and loan interest rates, together with the simultaneous loosening of the interest rate floating range of their financial institutions. Unquestionably, these measures resulted in a drastic change of the operating strategies of the whole banking system, for both nationalized and the private commercial banks. The article follows up on the causes and effects of these decisions in the Chinese banking arena, predicting a higher possible level of bad loans and followed by a higher systemic risk due to the three major banks’ reactions and copy-cat decisions in fixing interest rates. The research methodology uses the GARCH (1,1) model and the VaR to identify the way the interests are adjusted and study if this decision indicated a real liberalization or rather a controlled interest rate change by the authorities. Eventually, the Chinese interest rate liberalization brought good and bad news to the economy, while the essence remains in how such liberalization is handled and what is intended for the entire economy.

Financial policy and insurance development: Do financial reforms matter and how?

This paper investigates the relationship between financial policies and life insurance development and how country-specific characteristics such as economic development level, financial structure, and governance environments influence the effect of financial reforms. We examine the association between life insurance development and the overall index as well as several sub-dimensions of financial reform, including interest rate liberalization, entry barriers, privatization, capital account restrictions, and securities market policy. We find that financial reforms alone are not significantly correlated with the development of the life insurance market. However, interest rate liberalization matters after accounting for the influence of country-specific characteristics.

Monetary Policy Transmission in China: A DSGE Model with Parallel Shadow Banking and Interest Rate Control

​The paper sheds light on the interplay between monetary policy, the commercial banking sector and the shadow banking sector in mainland China by means of a nonlinear stochastic general equilibrium (DSGE) model with occasionally binding constraints. In particular, we analyze the impacts of interest rate liberalization on monetary policy transmission as well as the dynamics of the parallel shadow banking sector. Comparison of various interest rate liberalization scenarios reveals that monetary policy results in increased feed-through to the lending and investment under complete liberalization. Furthermore, tighter regulation of interest rates in the commercial banking sector in China leads to an increase in loans provided by the shadow banking sector.

Trilemma Challenges for the People's Republic of China

This paper first reviews recent developments in exchange rate regimes, capital account liberalization, interest rate liberalization, and monetary policymaking in the People's Republic of China (PRC). It then observes that the PRC's monetary policy autonomy may have been reduced with falling capital control effectiveness and a rigid exchange regime that is still tightly managed against the United States (US) dollar. This hypothesis is investigated empirically using both the Taylor rule and a McCallum-like rule to test whether the PRC's money market interest rate and/or quantity of money supply are being increasingly influenced by the US interest rate or reserve accumulation. The paper concludes that there is considerable evidence suggesting diminishing monetary policy autonomy in the PRC. To regain policy autonomy, the monetary authority needs to substantially increase exchange rate flexibility of the renminbi as long as it continues to pursue capital account opening.

Trilemma Challenges for the People's Republic of China

This paper first reviews recent developments in exchange rate regimes, capital account liberalization, interest rate liberalization, and monetary policymaking in the People's Republic of China (PRC). It then observes that the PRC's monetary policy autonomy may have been reduced with falling capital control effectiveness and a rigid exchange regime that is still tightly managed against the United States (US) dollar. This hypothesis is investigated empirically using both the Taylor rule and the McCallum-like rule to test whether the PRC's money market interest rate and/or quantity of money supply are being increasingly influenced by the US interest rate or reserve accumulation. The paper concludes that there is considerable evidence suggesting diminishing monetary policy autonomy in the PRC. To regain policy autonomy, the monetary authority needs to substantially increase exchange rate flexibility of the renminbi as long as it continues to pursue capital account opening.

Interest Rate Liberalization in China

Embarking on interest rate liberalization reforms nearly two decades ago, China has made significant progress. Our paper takes a closer look at interest rate liberalization in China, and reviews historical progress and current efforts that Chinese authorities have made to date. Similar to international experiences, the process of market-based interest rate reform is to liberalize interest rates of the money market and bond market prior to those charged for deposits and loans. In gradually liberalizing the loan and deposit rates, reform measures are introduced on foreign currencies before domestic currency, on loans before deposits, and on long-term and large-value loans and deposits before short-term and small-value instruments. Until now, the authorities has yet to take the final and most critical step — removing deposit rate ceilings — to reach full interest rate liberalization. Our paper also explains why the pace of interest rate liberalization is too slow, and points out the main barrier to the further liberalization. In addition, the appendix of this paper provides a chronicle of interest rate liberalization during the period from the beginning of the reform to 2014.

Determinants of Bank Deposits in Ghana: Does Interest Rate Liberalization Matters?

This research paper examines the effect of interest rate liberalization on bank deposits in a developing country Ghana. A deposit function model was specified with long term deposit as the main dependent variable with real savings rate, real treasury bill rate, exchange rate movement and gross domestic product as independent variables while controlling for inflation. Ordinary Least Squares (OLS) method was used to estimate the specified model which covered seasonally adjusted quarterly data drawn from Bank of Ghana and Ghana Statistical Service. The data were input into a spreadsheet and exported into Econometric View 7 which was used for processing the data. The results of the study revealed that the interest rate liberalization and gross domestic product jointly accounted for about 78% of the variation in the level of bank savings deposits in Ghana. The study has also shown that the liberalization of the interest rates has made it attractive for people with idle funds to save with financial institutions especially the banks. It also revealed a negative relationship between real savings rate and the real treasury bill rate expected in a high inflationary environment. All the independent variables were significant. It is therefore recommended that the Bank of Ghana remains resilience on interest rate liberalization so that surplus funds can be made available for investors and also to reduce the level of inflation in Ghana.

Empirical Investigation of the Impact of Deposit Rates on Fund Mobilization by Deposit Money Banks in Nigeria

Empirical Investigation of the Impact of Deposit Rates on Fund Mobilization by Deposit Money Banks in Nigeria Ogbulu, Onyemachi Maxwell; Uruakpa, Peter Chinyere; Umezinwa, Chizoba Lynda Abstract The objective of this paper is to investigate the nature of the relationship between deposit rates (disaggregated into various categories of deposit rates charged by DMBs in Nigeria) and deposit mobilization in Nigeria within the period 1981 and 2012 using annual data collected from the Statistical Bulletin published by the CBN. Using the OLS multiple regression, unit root tests, co-integration, error correction mechanism (ECM) and Granger causality tests, the empirical results report no significant relationship between all categories of deposit rates and total deposit liabilities of DMBs in Nigeria. The same results were also obtained with respect to the impact of deposit rates on time, savings and foreign currency deposits. In addition, the paper found no granger causality relationship between deposit rates and deposit liabilities. It is therefore recommended that a policy of interest rate liberalization alone may not be enough to induce higher levels of fund mobilization. The government should pursue programmes aimed at boosting investment and growing the economy to increase incomes that would release further savings for sustainable growth. Full Text: PDF DOI: 10.15640/jfbm.v3n1a8

Interest Rate Liberalization and Fiscal Policy in China: A New Keynesian DSGE Model

By building a new Keynesian dynamic stochastic general equilibrium (DSGE) model, we analyze the effect of interest rate liberalization on fiscal policy. First, we find that when the interest rate increases, technology shocks, monetary policy shocks, and fiscal policy shocks can effectively stabilize economic fluctuations. Second, when the interest rate rises, fiscal policy enhances the positive effect on output first, with decreasing the negative effect on output later. Third, fiscal policy increases the original crowding-out effect on consumption and investment. However, this increase in the crowding-out effect does not restrain the positive effect of fiscal policy on output, which benefits from interest rate liberalization.