Monetary Policy and Liquidity of the Bond Market—Evidence from the Chinese Local Government Bond Market

Xiao Liu (), Yunzhe Hu, Fang Liu and Rongxi Zhou
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Xiao Liu: School of Economics and Management, North China University of Technology, Beijing 100144, China
Yunzhe Hu: China School of Banking and Finance, University of International Business and Economics, Beijing 100029, China
Fang Liu: Jinan City Construction Group Co., Ltd., Jinan 250014, China
Rongxi Zhou: China School of Banking and Finance, University of International Business and Economics, Beijing 100029, China

Mathematics, 2025, vol. 13, issue 16, 1-26

Abstract: The bond market serves dual roles in fiscal and financial spheres, playing a crucial role in coordinating monetary policy. This paper investigates the impact of quantitative and price-based monetary policies on the liquidity level of China’s bond market. A comprehensive index measuring the liquidity of the local bond market is constructed using a combination weighting method that integrates the entropy method and the coefficient of variation. Employing the time-varying stochastic volatility structure vector autoregression (TVP-SV-SVAR) model on data spanning from 2013 to 2021, this study empirically compares the impulse response of local bond market liquidity to monetary policy shocks. The findings reveal that both types of monetary policy operations exhibit asymmetric, nonlinear, and time-varying impacts on bond market liquidity. Quantitative monetary instruments induce deeper impulse responses, with longer-lasting effects. These conclusions offer insights for monetary policy reforms and bond market development in China.

Keywords: local government bond market; liquidity; monetary policy; TVP-SV-SVAR model; time-varying impulse response (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2025
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