The present study aims to explore the relationship between the sovereign yield curve and fiscal behaviour in China. The Chinese Government is very powerful, and fiscal policy plays an important role in China's economy. A dynamic Nelson–Siegel model is adopted to estimate the level, slope and curvature factors of the yield curve. Three aspects of fiscal behaviour, including government spending, revenue and budget balance, are considered. Significant relationships between fiscal behaviour and the sovereign yield curve are found and described in the present study. Higher government expenditure raises the level and slope factors of the yield curve, while increasing government revenue reduces the level factor and enhances the slope factor. Furthermore, improved budget balance decreases the level and slope factors of the yield curve. Fiscal behaviour also interacts with the macroeconomy in China. Fiscal policy is insensitive to price surges in contrast to the strong responses of monetary policy to higher inflation. In addition, crowding‐out effects of government spending are demonstrated in this study.
A dynamic Nelson-Siegel model is adopted to estimate three time-varying factors of yield curves, the level, the slope and the curvature, and a vector autoregressive model is built to study interactions between macro variables and the yield curve. Results show that, first, money supply growth is a more effective instrument to curb inflation than the monetary policy interest rate; however, the central bank also adjusts the interest rate to stabilize money supply. Second, investment is an important measure to stimulate the Chinese economy, but it also pushes up money supply growth, which results in higher inflation. Third, the yield curve reacts significantly to innovations to investment growth and money supply growth. The segmentation of China's bond market hinders the efficient implementation of monetary policy, and the monetary policy transmission mechanism is still weak in China. Finally, interactions between the yield curve and the macroeconomy in China are nearly unidirectional. Macroeconomic variables reshape the yield curve, but direct adjustments of the yield curve do not significantly change macroeconomic variables. Due to the incomplete liberalization of financial markets, there exists a wide disjunction between the real economy and financial markets in China.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.
hi@scite.ai
10624 S. Eastern Ave., Ste. A-614
Henderson, NV 89052, USA
Copyright © 2024 scite LLC. All rights reserved.
Made with 💙 for researchers
Part of the Research Solutions Family.