Abstract :In the first half of the year, China issued a package of policies to stabilize the economy, which proposed to expand credit supply and promote the steady decline of real loan interest rates. However, in the early days of COVID-19, the policy of interest rate reduction in major economies such as the US and Britain led to increased pressure on economic stagflation risk and the rising of asset prices. This paper constructs a Mixed-Frequency and Markov-Switching Dynamic Factor (MF-MS-DFM) Model to measure the business cycle of China’s economy, then examines the impact of interest rate cuts on macroeconomic and asset prices and the role of financial credit channels during different periods of economic cycle by constructing a Counterfactual Structural Vector Auto Regressive (CSVAR) model. The results show that during the economic expansion period, the interest rate reduction will accelerate the expansion of financial credit, and the financial credit channel can amplify the stimulating effect of the interest rate reduction on the macro-economy, but during the economic contraction period, the interest rate reduction will slow down 19 the expansion of financial credit, and the financial credit channel will weaken the boosting effect of the interest rate reduction on the macroeconomy. During the period of economic expansion, the financial credit channel will magnify the devaluation effect of interest rate reduction on RMB, strengthen the role of interest rate reduction in pushing up house prices and stock prices, and mitigate the rise in bond prices caused by interest rate reduction. This paper proves that 1) The financial credit channel is an important factor in the effect of interest rate reduction on macroeconomic boost, and financial credit channel in the economic contraction period may cause the interest rate reduction to be unable to effectively stimulate the economic recovery; 2) During the economic expansion period, the housing price and the stock price rise after the interest rate reduction exist credit driven factor, which provide references for the government and the central bank in policy formulation.

Keywords :interest rate policy; financial credit; economic cycle; macroeconomy; asset price