Dual-track interest rates and the conduct of monetary policy in China

China has a dual-track interest-rate system: bank deposit and lending rates are regulated while money and bond rates are market-determined. The central bank also imposes an indicative target, which may not be binding at all times, for total credit in the banking system. We develop and calibrate a theoretical model to illustrate the conduct of monetary policy within the framework of dual-track interest rates and a juxtaposition of price- and quantity-based policy instruments. We show the transmission of monetary policy instruments to market interest rates, which, together with the indicative credit target in the banking system, ultimately are the means by which monetary policy affects the real economy. The model shows that market interest rates are most sensitive to changes in the benchmark deposit interest rates, significantly responsive to changes in the reserve requirements, but not particularly reactive to open market operations. These theoretical results are verified and supported by both linear and GARCH models using daily money and bond market data. Overall, the findings of this study help us to understand why the central bank conducts monetary policy in China the way it does, using a combination of price and quantitative instruments with differing degrees of potency in terms of their influence on the cost of credit.     

Negative nominal interest rates: history and current proposals

Given the renewed interest in negative interest rates on base money—or equivalently ‘taxing money’—as a means for overcoming the zero bound on short-term nominal interest rates, this article reviews the history of negative nominal interest rates starting from the ‘taxing money’ proposal of Silvio Gesell up to current proposals that received popular attention in the wake of the financial crisis of 2007/2008. It is demonstrated that ‘taxing money’ proposals have a long intellectual history and that instead of being the conjecture of a monetary crank, they are a serious policy proposal. In a second step, the article points out that besides the more popular debate on a Gesell tax as a means to remove the zero bound on nominal interest rates, there is a class of neoclassical search models that advocates a negative tax on money as efficiency enhancing. This strand of the literature has so far been largely ignored by the policy debate on negative interest rates.     

Monetary policy and the yield curve at zero interest

In contrast to affine term structure models, Black’s (1995) model of interest rates as options has properties suitable to examine the yield curve when the short-term interest rate is near zero. We estimate a Black’s model with Japan’s data to extract market expectations about duration of zero interest. We find that expectations about duration have substantially varied, which contradicts with the assumption utilized in the literature. We also find a tight link between expectations about duration and survey measures of inflation expectations, which appears to be attributable to the Bank of Japan’s commitment conditional on inflation.     

Overcoming the zero bound on nominal interest rates: Gesell’s currency carry tax vs. Eisler’s parallel virtual currency

Despite the zero lower bound on the short nominal interest rate in Japan having become a binding constraint, conventional monetary policy in Japan, in the form of generalised open market purchases of government securities of all maturities, has never been pushed to the limit where all outstanding government debt and all current and anticipated future government deficits are (or are confidently expected to be) monetised. Open market purchases of private securities can create serious governance problems. Two ways of overcoming the zero lower bound constraint have been proposed. The first is Gesell’s carry tax on currency. The second is Eisler’s proposal for the unbundling of the medium of exchange/means of payment function and the numéraire function of money through the creation of a parallel virtual currency. This raises the fundamental issue of who chooses or what determines the numéraire used in private wage and price contracts—an issue that is either not addressed in the literature or addressed incorrectly. On balance, Gesell’s proposal appears to be the more robust of the two.     

Optimal choice of monetary policy instruments when policymaking is costly

Poole's analysis of the optimal choice of monetary policy instruments assumes that stochastic disturbances are temporary, that a monetary authority determines instrument settings each period, and that policymaking is a costless activity. This paper considers an environment in which shocks are cumulative, the monetary authority precommits to instrument settings for an interval of its own choosing, and the authority incurs costs when it adjusts its instrument settings. The key result that arises in this framework is that costs of policymaking generally induce a monetary authority either to choose a socially suboptimal policy instrument or to adjust its policy instrument settings over time in a manner that appears to be inefficient.     

利率市场化对我国货币政策有效性的影响

利率只有在市场经济体制的大环境中才有可能走向市场化。换句话说，利率的市场化要由市场经济体制为其提供最基础的条件。为什么在过去的很长一段时间内，我们并没有提出利率市场化的问题，原因就在于，过去实行的是计划经济体制，利率只是计划管理的工具，利率的影响作用被严格限制在一定的范围内，利率市场化与计划管理是对立的。后来，我     

The impact of net international capital inflows on nominal long-term interest rates in France

Previous research on the impact of net international capital inflows on domestic interest rates has been almost exclusively founded in regression analysis and has yielded mixed results. Some studies find that net capital inflows reduce domestic interest rates, whereas others find no such impact. The present study, which applies cointegration techniques to quarterly data over the 1973–93 period, finds that such capital inflows to a major industrialized nation, France, may not only reduce longer term interest rates in that nation but may also offset a large portion of the longer term interest rate impact of that nation's central government budget deficit. The author expresses his appreciation for helpful referee comments that improved the paper.     

Tax policy,regulated interest rates,and saving

The paper evaluates tax policy options designed to reduce distortions to savings behavior that occur when administered interest rates are set beneath market equilibrium levels. While the removal of controls on interest rates might be the best option, political, legal or institutional circumstances might well preclude this solution. It suggests that consumption (or sales) taxes can be designed so that, in the short term, the rate of return to saving can be changed to approximate the market-determined interest rate. The main advantage of the measure is that it can provide (a) time to develop appropriate legal and institutional structures for financial deregulation, and (b) an additional policy instrument that allows the burden of adjustment, in a stabilization policy setting, to be distributed over more than one instrument.     

Deposit market deregulation,implicit deposit rates,and monetary policy

Conclusion Previous analyses of the economic effects of deposit market deregulation generally have treated the gradual elimination of deposit rate ceilings and the effective removal of barriers to bank competition for deposits as separate issues. The key implication of the analysis utilized in this paper is that there are important interactions between these two forms of deposit market deregulation and their ultimate effects on market behavior and outcomes. One aspect of this interaction concerns the payment of implicit interest on deposit balances. Although implicit interest payments usually are viewed as a response to the imposition of ceilings on explicit deposit rates, the amount of implicit interest paid by banks in fact depends crucially upon the amount of monopoly power available to banks as a result of entry restrictions. Competition in deposit markets drives the implicit interest rate to 0 even if the explicit deposit rate is regulated, and the existence of imperfect competition in deposit markets makes the payment of positive implicit deposit interest a theoretical possibility even if the explicit deposit rate ceiling is removed.At a macroeconomic level, increased bank competition enhances the monetary and interest rate impacts of gradual relaxations of a binding deposit rate ceiling. If a ceiling on the explicit deposit rate is present, increased bank rivalry for deposits resulting from deregulation reduces monetary control whether the Fed targets a market interest rate or a reserve aggregate. When there is no ceiling on the explicit deposit rate, increased bank competition has ambiguous implications for monetary policy.The present trend in regulatory policy is pushing the U.S. financial system toward an environment in which explicit deposit rates are flexible, market determined variables and interbank rivalry for deposit funds is much more competitive. The thoretical analysis of this paper indicates that the likely results of these simultaneous developments are the demise of implicit deposit interest (marginal cost pricing of transactions services) and potential complications for the c onduct of monetary policy under either a reserve-oriented operating procedure or a procedure in which the Fed targets a market interest rate. However, the directions and magnitudes of the net impacts of those forms of deregulation ultimately are empirical issues that cannot be fully resolved.via a theoretical analysis.An earlier version of this paper was circulated by the Federal Home Loan Bank Board's Office of Policy and Economic Research as Invited Research Working Paper No. 59. The author is grateful for comments received from Donald Bisenius, Michael Bradley, Richard Brown, George Kanatas, Kenneth Kopecky, Byungkyu Lee, Randall Merris, Douglas Mitchell, Steve Peterson, Richard Startz, Richard Sweeney, Bill Witte, and participants in the Indiana University Money and Banking Seminar. Views expressed in this paper do not necessarily correspond to those of the Federal Home Loan Bank Board or the Board of Governors of the Federal Reserve System. Any errors are the author's alone.     

The behavior of market interest rates when information is incomplete

Conclusions This paper has attempted to show how participants in financial markets, in the face of incomplete information about the supply of and demand for money, might go about formulating expectations of future interest rates in making market-clearing decisions. In particular, it was seen that information about the current excess demand for money, extracted from the current interest rate, could be used in formulating these expectations.In studying the behavior of the resulting market-clearing interest rate, two key conclusions emerged. First, relative to a full-in-formation market-clearing rate, where money supply and money demand were assumed observable, the market-clearing interest rate under signal extraction resulted in a biased response. Second, the bias was found to be related to the rates at which the disturbances to money demand and money supply dissipated. This suggested a role for monetary policy in reducing this bias. But, conversely, this also showed that monetary policy could be a source of volatility of market-clearing interest rates, relative to their full-information values.     

Monetary policy at the zero interest bound: A model comparison exercise

In this paper, we summarize the findings from zero-interest-bound simulation exercises conducted on the policy/forecasting models of the three major central banks. After imposing a fixed-period zero-interest-bound episode on each model, we consider common variations in the monetary-policy reaction function to minimize the macro-economic consequences of such a deflationary regime. Although there is some heterogeneity in the ranking of these remedial policies, reflecting the different properties of the models, we find that more aggressive policy rules and price-targeting rules are potentially candidates for robust monetary strategies. J. Japanese Int. Economies 20 (3) (2006) 305–313.     

The response of long-term interest rates to news about monetary policy actions: Empirical evidence for the U.S. and Germany

The Response of Long-Term Interest Rates to News about Monetary Policy Actions. Empirical Evidence for the U.S. and Germany. — The authors reestimate the expectations theory of the term structure focusing on the question of how monetary policy actions indicated by changes in the very short rate affect long-term interest rates. Their main point is that the expectations hypothesis implies that very long rates should only react to unanticipated changes of the very short rate. In contrast to cointegration tests of expectations theory, this implication only requires rational expectations but not stationary risk premia. Therefore, its empirical test sheds new light on the importance of expectations theory for the determinants of the term structure of interest rates.     

金融创新对货币政策传导效率的影响——利率与信用管道的比较研究

金融创新使实际投资对利率的敏感程度下降，使金融资产之间替代转换程度提高，交易成本降低，全融资产价格对利率变化的反应程度提高。从而提高了交易效率和速度：其结果是，IS曲线变得更加陡峭，LM曲线变得更加平缓，致使货币政策利率渠道和信用渠道的传导机制和效果减弱，但信用渠道仍具有比较优势。因此金融创新条件下的货币政策执行更应关注银行的改革与证券市场的发展问题，同时为稳定经济，不可盲目快速推进金融创新。     

Flexible exchange rates and perfect foresight: The implications of domestic monetary policy for foreign prices and stabilization policy

Zusammenfassung Flexible Wechselkurse und vollkommene Voraussicht: Implikationen der inl?ndischen Geldpolitik für die Preisentwicklung und Stabilisierungspolitik im Ausland. — Vorgestellt wird eine Variante mit zwei L?ndern und vollkommener Voraussicht, die auf dem 1976 von Dornbusch entwickelten Modell flexibler Wechselkurse basiert. Die Güterpreise in beiden L?ndern passen sich danach nur z?gernd der übernachfrage an. Die Isolierung des ausl?ndischen Preisniveaus von einem unerwarteten dauerhaften Anstieg der heimischen Geldmenge erfordert in dem Augenblick eine sprunghafte Erh?hung der ausl?ndischen Geldmenge, in dem es im Inland zum Anstieg kommt, gefolgt von einem Rückgang auf das frühere Niveau. Soll das ausl?ndische Preisniveau bei einer im voraus angekündigten Geldpolitik im Inland stabilisiert werden, dann mu\ die ausl?ndische Geldmenge zu dem Zeitpunkt sprunghaft erh?ht werden, zu dem die Ankündigung im Inland erfolgt. Die weitere zeitliche Entwicklung der Geldversorgung im Ausland h?ngt von bestimmten Parametern des Modells ab, die n?her erl?utert werden.

---

Résumé Taux de change flexibles et la prévision parfaite: les implications des politiques monétaires locales pour les prix et la politique de stabilisation à l’étranger. — L’auteur présente une version de prévision parfaite et à deux pays d’un modèle des taux de change flexibles développé par Dornbusch en 1976. Les prix des biens dans les deux pays s’ajustent inertement à l’excès de demande. L’isolation du niveau de prix étranger d’une imprévue augmentation permanente du stock monétaire rend nécessaire un saut en stock monétaire étranger au moment où l’augmentation locale se passe, suivie par une réduction jusqu’au niveau initial. La stabilisation des prix à l’étranger au cas d’une politique locale monétaire préannoncée implique un saut en masse monétaire étrangère si l’annonce est faite. Le développement subséquent de la masse monétaire dépend des certains paramètres dans le modèle.

---

Resumen Tasas de cambio flexibles y predicción perfecta: las implicaciones de la política monetaria doméstica sobre los precios externos y la política de estabilización. — Se présenta una versión de predicción perfecta de dos países de un modelo de tasas de cambio flexibles de Dornbusch de 1976. Los precios de los bienes se ajustan en ambos países lentamente al exceso de demanda. La aislación del nivel de precios extranjero de un aumento permanente no anticipado del stock monetario del pais natal requière de un salto en el stock de monedas extranjeras cuando se produce el aumento doméstico, seguido de una disminución a su nivel original. Estabilización de precios extranjeros con una pol⩼ica monetaria doméstica preanunciada envuelve un salto en la oferta monetaria extranjera cuando se hace el anuncio. La trayectoria en el tiempo de la oferta monetaria depende de ciertos parámetros en el modelo.

     

The effect of real-time fiscal policy on sovereign interest rates in OECD countries

The aim of this study is to investigate the effect of real-time projections of fiscal policy stances on government bonds long-term interest rates using a panel of 20 OECD countries between 1992 and 2008. To deal with endogeneity arising from forecasts of fiscal balances the paper exploits instrumental variables and GMM estimators together with the variation in real-time primary balances. The study shows how a static specification that does not include the one-period lag of the interest rate is prone to serial correlation and to downward bias in standard errors. To correct the bias, a dynamic specification with the lagged interest rates used as explanatory variable should be used due to the intrinsic persistent behavior of the interest rates. Results show that when the persistency of the interest rates is taken into account, it corrects the bias in standard errors of the estimates, and the correlation between fiscal policy variables and sovereign rates disappears: the inertia of the behavior of interest rates is the only variable affecting the relation.     

Monetary policy shocks and interest rates: Further evidence on the liquidity effect

Monetary Policy Shocks and Interest Rates: Further Evidence on the Liquidity Effect. — This essay tests whether innovations in monetary policy are inversely linked with changes in interest rates. Using Mishkin’s efficient markets framework and the measures of policy innovations constructed by Boschen and Mills and Bemanke and Mihov, we find strong evidence that expansionary monetary policy shocks lower interest rates. We argue that the failure of most studies to find a significant liquidity effect is due to the endogeneity of the monetary aggregates which are used to measure policy shocks.     

Regional policy in a multiregional setting: when the poorest are hurt by subsidies

Regional policies that seek to reduce economic inequalities between regions are common. These policies normally involve subsidies or transfers to the poorest regions. Over any given short-term horizon such subsidies serve to reduce inter-regional inequalities, but as they also affect migration patterns the long-term effects are less clear. This paper demonstrates using a three-region general equilibrium model that subsidising the poorest region may be to the detriment of the periphery as a whole and even to the very region that receives the subsidy, if the subsidy draws firms away from a nearby region that would function better as a production centre. If the subsidy does not attract a sufficient number of firms to the subsidised region, then the long-term effect on the residents of that region would be negative. Though further research is needed to isolate the conditions under which such an effect would arise, this result has potentially important implications for the design of regional policy.     

Government budget deficits,nominal andex ante real long-term interest rates in the U.K., 1960:1–1990:2

This paper explores the impact of government budget deficits on the U.K. nominal and ex ante real long-term interest rates over the period from 1960:1 to 1990:2 utilizing an open and closed economy IS-LM model. An open economy IS-LM model indicates that nominal and ex ante real long-term interest rates are affected by the expected rate of inflation, the real money stock, the real government budget deficit, the real government spending, and the real balance of trade.The evidence presented suggests that increases in the U.K. budget deficits do contribute significantly to increases in nominal and ex ante real long-term interest rates. This implies that rising nominal and ex ante real long-term interest rates, as a result of high government budget deficits, would crowd out private investment and deter capital formation and long-term economic growth.