Volume 29, Issue 5, 2020
DOI: 10.24205/03276716.2020.1054
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 Chinese interest rate marketization since 2014. The focus is on the pass-through (PT) of policy rates to the market target rates and therefore PT to interbank market rates. The results suggest that the long-run PT of the policy rates to the market target rates and the market target rates PT to the interbank market rates are all significant. The PT of the 7-day interest rate of the open market operations (Repo07) to market target rates which are 7-day depository-institutions pledged repo rate (DR007) and 7-day Shanghai interbank offered rate (Shibor07) are both complete for up to 28 days and 60 days, respectively. However, even though the PBC implements the interest corridor since 2014 and set the interest rate of standing lending facilities (SLF07) as the upper bound, the PT of SLF07 to the market target rates are not complete. Meanwhile, the PT of the market target rates DR007 and Shibor07 to the interbank market rates which are 7-day interbank pledged repo rate (R007) and 7-day interbank offered rate (Chibor07) are both complete. The results confirm that Repo07 as the PBC’s policy rate takes an important leading role and DR007 as the PBC’s market target rate takes an important intermediate role in the Chinese interest rate pass-though.
Keywords
interest rate pass through; interest rate marketization; policy rate; market target rate; interbank market rate