Interest Rate Determination in China: Past, Present, and Future

Dong He, Honglin Wang and Xiangrong Yu ()
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Honglin Wang: International Monetary Fund

International Journal of Central Banking, 2015, vol. 11, issue 4, 255-277

Abstract: How should we think about the determination of interest rates in China after interest rate liberalization? Would effective deposit rates, lending rates, and bond yields move higher or lower? We argue that interest rates in a liberalized environment would need to be anchored by monetary policy. To achieve price and output (or employment) stabilization, the policy rate should be set close to China’s equilibrium or natural rate. We sketch three preliminary approaches to estimation of the natural rate. Based on this analysis, we argue that interest rates on large deposits and short-term money-market rates would likely move higher following liberalization. The effect on effective lending rates is somewhat ambiguous, as the contestability of the banking sector and the competition from the bond markets are likely to increase. We leave the determination of the curvature of the yield curve to future research.

JEL-codes: E43 E52 O53 P24 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Interest Rate Determination in China: Past, Present, and Future (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2015:q:5:a:7

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