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This paper models the dynamics of Chinese yuan (CNY)–denominated long-term interest rate swap yields. The financial sector plays a vital role in the Chinese economy, which has grown rapidly in the past several decades. Going forward, interest rate swaps are likely to have an important role in the Chinese financial system. This paper shows that the short-term interest rate exerts a decisive influence on the long-term swap yield after controlling for various macrofinancial variables, such as inflation or core inflation, the growth of industrial production, percent change in the equity price index, and the percentage change in the CNY exchange rate. The autoregressive distributed lag (ARDL) approach is applied to model the dynamics of the long-term swap yield. The empirical findings show that the People’s Bank of China’s influence extends even to the over-the-counter derivative products, such as CNY interest rate swap yields, through the short-term interest rate. The findings reinforce and extend John Maynard Keynes’s notion that the central bank’s actions have a decisive role in setting the long-term interest rate in emerging market economies, such as China.



Working Paper No. 1014, downloaded from the Levy Economics Institute of Bard College. The Levy Economics Institute Working Paper Collection presents research in progress by Levy Institute scholars and conference participants. The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals.

The data set used in the empirical part of this paper is available upon request to bona fide researchers for the replication and verification of the results.

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Creative Commons Attribution 4.0 International License
This work is licensed under a Creative Commons Attribution 4.0 International License.



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