Abstract: We construct a Dynamic Stochastic General Equilibrium (DSGE) model to illustrate the transmission mechanism of the central bank policy rate in China based on Ma and Wang (2014). Using a bank-centric financial system to characterize China’s economy, our model qualitatively demonstrates and quantitatively simulates the transmission a policy rate change to market rates and then the real economy, especially when various administrative restrictions and market frictions are in place. We prove that a high deposit reserve requirement ratio, loan-to-deposit ratio restriction, and loan quota may weaken or distort policy rate transmission. We also extend the dynamic model to estimate the transmission efficiency loss due to business cycle factors. A key policy implication of this study is that China should gradually remove various quantitative restrictions and further reduce the reserve requirement ratio, in order to facilitate the transition to the new monetary policy framework.

Full report ：  A dynamic study of interest rate transmission mechanism-- a DSGE analysis.pdf