Title

The determinants of the benchmark interest rates in China

Document Type

Article

Publication Date

3-1-2018

Publication Title

Journal of Policy Modeling

Volume

40

First Page

395

Last Page

417

Keywords

In-sample fit, Monetary policy, Ordered probit model, Out-of-sample forecast, People's Bank of China

Abstract

© 2018 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.

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