Monetary policy and interest rate rigidity in China

This study examines the conduct of monetary policy and the setting of deposit and lending rates in China. As China is still in the transitional stage from a centrally planned economy to a market economy, State-Owned Enterprises and banks are being restructured and financial markets are being developed. Our findings show that there is a long-term relationship between interest rates and inflation, but the relationship is weak. In the short run, the central bank adjusts deposit and lending rates downward faster than they adjust them upwards. The weak long-term relationship reflects the fact that the interest rate as a tool of monetary policy is rather ineffective in China and the asymmetric adjustment speed shows that interest rates are kept deliberately below their equilibrium levels for the state-sponsored objective of stimulating economic growth, creating jobs and maintaining financial stability.