The Determinants of the Benchmark Interest Rates in China: A Discrete Choice Model Approach

Hyeongwoo Kim () and Wen Shi ()

No auwp2017-04, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: This paper empirically investigates the determinants of the two key benchmark interest rates in China using an array of constrained ordered probit models for quarterly frequency data from 1987 to 2013. Specifically, we estimate the behavioral equation of the People's Bank of China that models its decision-making process for revisions of the benchmark deposit rate and the lending rate. Our findings imply that the PBC's policy decisions are better understood as responses to changes in inflation and money growth, while output gaps and the exchange rate play negligible roles. We also implement in-sample fit analyses and out-of-sample forecast exercises. Our empirical findings show robust and reasonably good performances of our models in understanding dynamics of these benchmark interest rates.

Keywords: Monetary Policy; People's Bank of China; Ordered Probit Model; Deposit Rate; Lending Rate; In-Sample Fit; Out-of-Sample Forecast (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2017-05
New Economics Papers: this item is included in nep-cna, nep-dcm, nep-mac, nep-mon and nep-tra
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https://cla.auburn.edu/econwp/Archives/2017/2017-04.pdf (application/pdf)

Related works:
Working Paper: The Determinants of the Benchmark Interest Rates in China: A Discrete Choice Model Approach (2016)
Working Paper: The Determinants of the Benchmark Interest Rates in China: A Discrete Choice Model Approach (2014)
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