THE EFFECTS OF SHORT-TERM INTEREST RATES ON OUTPUT, PRICE AND EXCHANGE RATES: RECENT EVIDENCE FROM CHINA

Shuzhang Sun, Christopher Gan and Baiding Hu ()

The International Journal of Business and Finance Research, 2010, vol. 4, issue 1, 173-191

Abstract: This paper utilizes VAR techniques to examine the relationship between a policy related variable and selected macro-variables in China. Johansen’s cointegration tests fail to find a moving equilibrium among the related variables. Based on a VAR model in first differences, we find that an unexpected temporary one-off shock to the change in the seven-day money market interbank borrowing rate does not have significant influence on GDP changes but a significant influence on price level changes in a wrong direction. Empirical testing demonstrates that the seven-day Repo rate has an insignificant influence on both GDP changes and on the price level changes. Furthermore, the relationships between monetary aggregate (M2) and short-run money market interest rates suggest that the short-run interest rates do not have significant influence on the monetary aggregate. Therefore, we have determined that short-run money market interest rates are ineffective as a monetary policy-operating objective.

Keywords: monetary; money; macroeconomic policy (search for similar items in EconPapers)
JEL-codes: E4 E5 E6 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (3)

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Journal Article: THE EFFECTS OF SHORT-TERM INTEREST RATES ON OUTPUT, PRICE AND EXCHANGE RATES: RECENT EVIDENCE FROM CHINA (2010)
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