The Transmission Channels of Monetary Policy of Treasury Yield Curve: Theoretical Mechanism and China's Experiences

Abstract

Abstract: The continuous accumulation of downward pressure in the global economy indicates that China may stay in a low interest rate environment for a long time. Therefore, it is necessary to strengthen the guidance of monetary policy for the treasury yield curve, so as to let long-term interest rate play the role of regulation. The results of the theoretical analysis show that China's current monetary policy framework has possessed the operational conditions to transmit to the treasury yield curve through the signaling channel and the portfolio balance channel. The empirical results further confirm the effectiveness of the two channels in the transmission. Specifically, the transmission effect through the signaling channel is stronger than that through the portfolio balance channel. The role of the signaling channel is short-term, and its direction is consistent with the goal of monetary policy; while the role of the portfolio balance channel is long-term, its direction is opposite to the goal of monetary policy in the short term, and is consistent with the goal of monetary policy in the medium and long term. The transmission effect of the two channels is weaker in the easing period of monetary policy, but stronger in the tightening period of monetary policy, which shows significant asymmetric characteristics. It is suggested that the People's Bank of China should optimize the monetary policy transmission mechanism of both the signaling channel and the portfolio balance channel and open up the interest rate transmission path with the treasure yield curve as the core.

Key words: low interest rate environment, monetary policy, treasury yield curve, signaling channel, portfolio balance channel

GUAN Yu, WANG Xuebiao. The Transmission Channels of Monetary Policy of Treasury Yield Curve: Theoretical Mechanism and China's Experiences[J]. JOURNAL OF CONTEMPORARY FINANCE AND ECONOMICS, 2022, 0(2): 58-72.

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