Abstract: This study employs various econometric approaches to empirically test the effectiveness of interest rate transmission via yield curves in China. Our results indicate that, (1) the transmission of short-term rate changes to medium- and long-term yields in China is around 25% weaker than in other major countries; (2) market efficiency tests suggest less than perfect functioning in certain aspects of the bond market; (3) bond yields in China could be used as a tool to forecast economic growth, inflation, and interest rates, which facilitates monetary policy transmission the expectation channel. We believe that the relatively weaker interest rate transmission in China (vs. some other countries) has to do with the issuance structure of treasuries, market access restrictions for investors, under-development of the derivatives market, and the pricing behavior of commercial banks. We propose several reforms to address these problems.

Full report ：  WP No.20161 The Role of Yield Curves in Monetary Policy Transmission.pdf