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The determinants of the benchmark interest rates in China

Hyeongwoo Kim () and Wen Shi ()

Journal of Policy Modeling, 2018, vol. 40, issue 2, 395-417

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; In-sample fit; Out-of-sample forecast (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:40:y:2018:i:2:p:395-417

DOI: 10.1016/j.jpolmod.2018.01.012

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