Has the Chinese Economy Become More Sensitive to Interest Rates? Studying Credit Demand in China

41 Pages Posted: 7 Apr 2008  

Tuuli Koivu

Bank of Finland

Date Written: February 15, 2008

Abstract

Chinese authorities have traditionally relied mainly on administrative and quantitative measures in conducting monetary policy, with interest rates playing a less prominent role. Additional support for this view resides in a number of earlier studies that have found that the impact of interest rates on the real economy has been miniscule. However, taking into account numerous reforms in the financial sector and more widely in the Chinese economy, interest rates may have gained some influence in the last few years. It is important to study the effectiveness of interest rates also in light of future reforms of the monetary policy tools in China. Whereas administrative policy measures were effective in guiding the behaviour of state-owned enterprises, the authorities may need to increase the use of more market-oriented monetary policy tools as the share of the economy in private and foreign ownership grows. We use a vector error correction model to study, within a credit demand framework, whether the impact of interest rates in China has become stronger over the last decade. Our results suggest that loan demand has indeed become more dependent on interest rates, albeit the channel from interest rate to the real economy is still weak.

Keywords: China, monetary policy

JEL Classification: E52, P24

Suggested Citation

Koivu, Tuuli, Has the Chinese Economy Become More Sensitive to Interest Rates? Studying Credit Demand in China (February 15, 2008). BOFIT Discussion Paper No. 1/2008. Available at SSRN: https://ssrn.com/abstract=1116184 or http://dx.doi.org/10.2139/ssrn.1116184

Tuuli Koivu (Contact Author)

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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