How Does Chinese Monetary Policy Affect the Term Structure of Government Bond Yields?--Based on the Expectation Channel and the Premium Channel

Abstract

Abstract: Based on an AGDTSM model, this paper decomposes Chinese government bond rates into interest rate expectation and risk premiums. Empirically we tested the influencing mechanism of monetary policy on the interest rate term structure of national debt with the double perspectives of the expectation channel and the premium channel. The main conclusions of this study are as follows. Firstly, Chinese present monetary policy is affecting the interest rate term structure of government bond mainly through the expectation channel, while the effect of the premium channel is limited. Secondly, the guiding direction of the expectation channel is consistent with the monetary policy targets, at the initial stage of the policy the premium channel will weaken the guidance effect of the expectation channel. Thirdly, the expectation channel has a stronger guiding strength on the short end of the government bond yield curve, but weaker on the long end. This difference is the fundamental cause leading to the recent “extreme flattening” of the recent government bond yield curve.

Key words: monetary policy, interest rate term structure of government bond, expectation channel, premium channel

GUAN Yu, WANG Xuebiao, SUN Guanglin. How Does Chinese Monetary Policy Affect the Term Structure of Government Bond Yields?--Based on the Expectation Channel and the Premium Channel[J]. JOURNAL OF CONTEMPORARY FINANCE AND ECONOMICS, 2019, 0(2): 51-65.

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