China's interest rate pass-through after the interest rate liberalization: Evidence from a nonlinear autoregressive distributed lag model

This study examines the interest rate pass-through (IRPT) mechanism in China after the interest rate liberalization by using the nonlinear ARDL (NARDL) model proposed by Shin et al. (2014). In order to dissect the IRPT of China appropriately, the interest rate transmission is divided into three stages in which changes in the policy rate are first transmitted to the target market rate and in turn, to the other interbank market rates and treasury bond rates, and eventually to the bank retail rates and corporate bond rates. The empirical results show that though changes in the monetary policy rate can be completely transmitted to the policy target market rate, they appear to be passed on to the other interbank market rates excessively and to the bank lending rates incompletely. Moreover, the pass-through from the policy target rate to the bond market rates is in general more sufficient than the pass-through to the bank retail rates. In addition, the patterns of asymmetry can be identified for the pass-through in the second and third stages, with the impact of positive shocks on the policy target rate being more pronounced than that of negative shocks either in the short or long run. These findings suggest that the interest rate transmission after the interest rate liberalization in China is far from being as effective as expected, and policy rate cuts might not have desirable effects on the real economy in the context of the recession.