A Comparative Empirical Study on the Macroeconomic Objectives and Effectiveness of Interest Rate Policies of China and U.S.

Abstract

This paper summarizes the relevant literatures about the economic effects of interest rate policy and Taylor rules, on the basis of which macroeconomic objectives indicators of China’s and U.S.’s interest rate policies are come up with. Then the macro-economic objectives and effectiveness of their interest rate adjustment policies are studied through Granger causality test and multivariate co-integration regression model. The result shows: Firstly, both of China and U.S. take economic growth, price level and employment level into consideration when adjust the benchmark interest rates. China’s adjustment pays more attention to stable price level and promoting employment level, while U.S.’s adjustment focuses more on stimulating economic growth and promoting employment level. Secondly, compared with China, U.S.’s market-oriented interest rate adjustment mechanism is more effective to reflect and respond to changes in the macroeconomic situations. Thirdly, the effectiveness of U.S.’s adjustment is obviously superior to China’s. U.S.’s benchmark interest rate adjustment can significantly affect the economic growth and employment level, and price level to some extent as well; while China’s effectiveness is confined to price level. Therefore, China should accelerate the interest rate liberalization and learn from U.S. to reform the function mechanism of interest rate policy, so as to enhance the interest rate policy on the sensitivity and effectiveness of macro-economy.