Understanding the Influence of Interest Rate Liberalization on Economic Structure and Monetary Policy

Xiaowen Hu; Bing Xu; Shangfeng Zhang

doi:10.20965/jaciii.2015.p0500

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JACIII Vol.19 No.4 pp. 500-507

doi: 10.20965/jaciii.2015.p0500

(2015)

Paper:

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Understanding the Influence of Interest Rate Liberalization on Economic Structure and Monetary Policy

Xiaowen Hu^*,, Bing Xu^, and Shangfeng Zhang^**,†

^*School of Economics and Management, Anhui Normal University
1 Beijing East Road, Wuhu, Anhui 241000, China

^**Research Institute of Econometrics and Statistics, Zhejiang Gongshang University
18 Xuezheng Street, Xiasha Education Park, Hangzhou, Zhejiang 310018, China

^†Corresponding author

Received:

December 18, 2013

Accepted:

April 7, 2015

Published:

July 20, 2015

Keywords:

economic structure, policy shocks, bayes estimation, dynamic stochastic general equilibrium model

Abstract

In this paper, a dynamic stochastic general equilibrium model with price stickiness is constructed to analyze quantitatively the effect of interest rate liberalization on economic structure and monetary policy. Using parameter calibration and Bayes estimation, we analyze the impulse responses and numerical simulation of the external shocks of technology shocks and monetary policy shock. The empirical results find the following conclusion: Firstly, the interest rate liberalization is conducive to economic restructuring as the investment ratio and capital growth is suppressed and the household and government consumption ratio is promoted. Secondly, the interest rate liberalization can lower economic fluctuation, and enhance the defense ability against external shocks such as technological shocks and monetary policy shocks. Moreover, the interest rate liberalization is help to dredge the monetary policy transmission channels as the interest rate shocks on the real economy is gradually increased.

Cite this article as:

X. Hu, B. Xu, and S. Zhang, “Understanding the Influence of Interest Rate Liberalization on Economic Structure and Monetary Policy,” J. Adv. Comput. Intell. Intell. Inform., Vol.19 No.4, pp. 500-507, 2015.

Data files:

References

[1] M. J. Fry, “Money, Interest, and Banking in Economic Development,” Baltimore and London: Johns Hopkins University Press, 1988.
[2] A. H. Gelb, “Financial Policies, Growth, and Efficiency,” World Bank-free PDF, 1989.
[3] A. A. Levchenko, R. Ranciere, and M. Thoenig, “Growth and Risk at the Industry Level: the Real Effects of Financial Liberalization,” J. of Development Economics, Vol.89, No.2, pp. 210-222, 2009.
[4] O. Bandiera, G. Caprio, P. Honohan, and Fabio Schiantarelli, “Does Financial Reform Raise or Reduce Saving?,” The Review of Economics and Statistics, Vol.82, No.2, pp. 239-263, 2000.
[5] C. M. Reinhart and I. Tokatlidis, “Before and After Financial Liberalization, Forthcoming,” 2001.
[6] S. Xu and H. Li, “A Model for Interest Rate Liberalization,” J. of World Economy, Vol.29, No.6, pp. 13-22, 2006.
[7] Z. Jin, H. Hong, and H. Li, “The Effectiveness of Interest Rate Liberalization,” Economic Research J., Vol.4, pp. 69-82, 2013.
[8] S. Chaohui, “The international experience of interest rate liberalization of our country finance operation,” J. of Financial Theory and Practice, Vol.7, pp. 41-45, 2010.
[9] L. Ball and D. Romer, “Sticky prices as Coordination Failure,” American Economic Review, Vol.81, pp. 539- 552, 1991.
[10] O. J. Blandchard and N. Kiyotaki, “Monopolistic competition and the effects of aggregate demand,” American Economic Review, Vol.77, pp. 647-666, 1987.
[11] Carl E. Walsh, “Monetary Theory and Policy,” 2nd Ed., pp. 230-268, Cambridge, Massachusetts: The MIT Press, 2003.
[12] J. Gali and M. Gertler, “Inflation dynamics: A structural econometric analysis,” J. of Monetary Economics, Elsevier, Vol.44, No.2, pp. 195-222, 1999.
[13] G. A. Calvo, “Staggered Prices in a Utility Maximizing Framework,” J. of Monetary Economics, Vol.12, No.3, pp. 383-398, 1983.
[14] B. Liu, “Dynamic Stochastic General Equilibrium Model and Its Application,” China Financial Publishing House, 2010.
[15] M. Woodford, “Interest and Price,” Foundations of a theory of monetary policy, Princeton UniversityPress, 2003.

This article is published under a Creative Commons Attribution-NoDerivatives 4.0 Internationa License.

[1] [1] M. J. Fry, “Money, Interest, and Banking in Economic Development,” Baltimore and London: Johns Hopkins University Press, 1988.

[2] [2] A. H. Gelb, “Financial Policies, Growth, and Efficiency,” World Bank-free PDF, 1989.

[3] [3] A. A. Levchenko, R. Ranciere, and M. Thoenig, “Growth and Risk at the Industry Level: the Real Effects of Financial Liberalization,” J. of Development Economics, Vol.89, No.2, pp. 210-222, 2009.

[4] [4] O. Bandiera, G. Caprio, P. Honohan, and Fabio Schiantarelli, “Does Financial Reform Raise or Reduce Saving?,” The Review of Economics and Statistics, Vol.82, No.2, pp. 239-263, 2000.

[5] [5] C. M. Reinhart and I. Tokatlidis, “Before and After Financial Liberalization, Forthcoming,” 2001.

[6] [6] S. Xu and H. Li, “A Model for Interest Rate Liberalization,” J. of World Economy, Vol.29, No.6, pp. 13-22, 2006.

[7] [7] Z. Jin, H. Hong, and H. Li, “The Effectiveness of Interest Rate Liberalization,” Economic Research J., Vol.4, pp. 69-82, 2013.

[8] [8] S. Chaohui, “The international experience of interest rate liberalization of our country finance operation,” J. of Financial Theory and Practice, Vol.7, pp. 41-45, 2010.

[9] [9] L. Ball and D. Romer, “Sticky prices as Coordination Failure,” American Economic Review, Vol.81, pp. 539- 552, 1991.

[10] [10] O. J. Blandchard and N. Kiyotaki, “Monopolistic competition and the effects of aggregate demand,” American Economic Review, Vol.77, pp. 647-666, 1987.

[11] [11] Carl E. Walsh, “Monetary Theory and Policy,” 2nd Ed., pp. 230-268, Cambridge, Massachusetts: The MIT Press, 2003.

[12] [12] J. Gali and M. Gertler, “Inflation dynamics: A structural econometric analysis,” J. of Monetary Economics, Elsevier, Vol.44, No.2, pp. 195-222, 1999.

[13] [13] G. A. Calvo, “Staggered Prices in a Utility Maximizing Framework,” J. of Monetary Economics, Vol.12, No.3, pp. 383-398, 1983.

[14] [14] B. Liu, “Dynamic Stochastic General Equilibrium Model and Its Application,” China Financial Publishing House, 2010.

[15] [15] M. Woodford, “Interest and Price,” Foundations of a theory of monetary policy, Princeton UniversityPress, 2003.

Understanding the Influence of Interest Rate Liberalization on Economic Structure and Monetary Policy

Xiaowen Hu*,**, Bing Xu**, and Shangfeng Zhang**,†

Xiaowen Hu^*,, Bing Xu^, and Shangfeng Zhang^**,†