This paper is aimed to analyze how the transformation in China's financial structure impacts on the interest rate channel of monetary policy transmission. For this purpose, quarterly data for the period from 1992 to 2003 are used. This paper starts out with a bird's eye on the associated institutional reform of monetary policy mechanics, including changes in instruments, inflation output variability frontier target, rules and transmissional mechanism of monetary policy. By partitioning the data into two subsamples in the breakpoint sense, this paper then empirically tests the role of financial structure in determining the change in the Granger causality among available instruments of monetary policy, estimates with GMM technique the role of financial structure in determining the monetary policy reaction function, and simulates with VAR technique the role of financial structure in determining the effect of monetary policy transmission through interest rate channel. The relevant evidences show both the Granger causality between pairs of monetary policy instruments and the monetary policy reaction function are dynamically instable in transitional China. This instability indicates that with increasing endogeneity of monetary policy, the transformation of financial structure does have a role for the nature and the interest rate channel's strength of monetary transmission.
Economic Research Journal