| Recently financial crises have frequently taken place in the developing countries which perform the opening-up policy. The derivation of each crisis involves the risk on linkage mechanism of interest rate and exchange rate. Interest rate is as the domestic price of one currency, and exchange rate is as the foreign price of one currency. The two economic variables, taking actions each other, and even involved monetary supply, construct a feedback process. That is called dynamic linkage mechanism about interest rate and exchange rate. With China faster opening-up to the outside, if we pay little attention to risk on linkage mechanism of interest rate and exchange rate and don't reasonably frame the interest rate and foreign exchange rate liberalization steps, then a country will experience real sector distress of various degrees of severity, even bank crisis. So it is very important to research risk on linkage mechanism of renminbi interest rate and exchange rate in open economy from part invalidation of interest rate and exchange rate mechanism rate mechanism. Nowadays the interest rate liberalization and exchange rate reform in China have caught the focus of the researchers around the world, but little research has been done in risk dynamic linkage mechanism area. What is the inner principles of risk on linkage mechanism of interest rate and foreign exchange rate? Is there linkage between renminbi interest rate and exchange rate in China's transitional economy? How to measure and prevent the risk in China's future complete market economy is a problem which must be solved properly. All these questions are waiting for research.This dissertation rounds the questions of above-mentioned three aspects closely, and four following levels are launched in this dissertation to carry out the empirical and theoretical research on the discussion about risk linkage mechanism of renminbi interest rate and exchange rate in open economy.1. First level (Chapter 2): To start with the manifestation of interest rate risk and exchange rate risk,this dissertation constructs mathematical models to analyse the general linkage mechanism in different system environment. In the course of analyzing the concept,this dissertation points out an objective law that the risk always exists both in China's transitional economy and in China's future complete market economy.The analysis shows that: a) There is difference between linkage mechanism and interest rate and exchange rate policy. Interest rate and exchange rate policy is considered subjective, and they are determined by the currency authorities. Linkage mechanism of interest rate and foreign exchange rate seems to be objective, and it provides the foundation for central bank to make decisions of interest rate and foreign exchange rate policy. That is to say, policy can be coordinated. But interest rate and foreign exchange as price signals to deploy resource, are objective. b) The risk is firstly a kind of volatility,and then transformation and sublimation from quantitative changes to qualitative changes in the course of development and accumulation. It is destructive. c) The linkage mechanism about interest rate risk and exchange rate risk will change with different regions, countries and periods. So it is suggested to use overseas operational practice and to construct linkage mechanism according to fundamental realities of China.2. Second level (Chapter 3): Chapter 3 is concerned about linkage mechanism about interest rate risk and exchange rate risk in China's transitional economy. To start from reviewing twenty years development of renminbi interest rate and exchange rate reform, this dissertation does cointegration tests, together with Granger Causality tests, and Structural Vector Autoregressions(SVAR),and then constructs the system to take empirical research on whether there is linkage between renminbi interest rate and exchange rate in China's transitional economy.The analysis shows that: a) There has been weak linkage between interest rate and exchange rate in China. With faster steps of financial system liberalization, linkage mechanism of renminbi interest rate and exchange rate is becoming closer and closer. The process not only improves resource deployment efficiency, but also has negative effect on stability of domestic economy by risk dynamic linkage mechanism imposed. b) Based on the above conclusions, some corresponding policy recommendations are put forward for risk prevention and management, including the reform in state-owned commercial banks, the reform in mandatory settlement system, deregulation of deposit interest rate and introducing unremunerated reserve requirement (URR), etc.3. Third level (chapter 4 and chapter 5): this dissertation deals with linkage mechanism about interest rate risk and exchange rate risk in China's future complete market economy. To begin with the risk prevention, chapter 4 sums up the concrete indicator that is being used by the academia and business circles researches on financial crises or currency crises, forms the index system, structures mathematical models such as FCE, GCE for risk on linkage mechanism, and examines the real example through the concrete instance. To start with the risk adjustment, chapter 5 puts forward three constructive suggestions for risk countermeasure in China future complete market economy, including perfecting monitoring system of cross-border capital flow, establishing interest rate corridor and setting up exchange stabilization fund.The analysis shows that: a) Introduce the analytic hierarchy process(AHP) in order to formulate weight of each warning indicator. Warning indicator weights reflect relatively important degrees in risk evaluation. Combining qualitative analysis with quantitative analysis, AHP can enhance efficiency of risk evaluation. b) Fuzzy Comprehensive Evaluation Model and Grey Correlation Model (GCM) have certain reference value in practice. c) Monitoring cross-border capital flow,establishing interest rate corridor and setting up exchange stabilization fund can be seen as a good frame for preventing risk on linkage mechanism.The main innovations of this dissertation are as follows:1. Attempt to analyze the inner mechanism of risk on linkage mechanism of interest rate and foreign exchange rate. This dissertation defines the risk from the visual angle of volatility, and treats the risk with the eyes of dynamic and development. At present research on the concept of risk is rare. It doesn't make deep discussions about the logical correlation between risk on linkage mechanism and financial crises. Moreover, the phase of manifestation of interest rate risk and exchange rate risk is different in the course of perfecting market economy. The risk is firstly a kind of volatility , and then transformation and sublimation from quantitative changes to qualitative changes in the course of development and accumulation. It is destructive. In addition,the manifestation of risk linkage mechanism is divided into two stages. One is the risk in China's transitional economy and the other is the risk in China's future complete market economy. The former is the loss induced by the interruption between interest rate mechanism and exchange rate mechanism. The latter is the loss caused by unexpected factors such as hedge fund and SARS. The classification will help risk countermeasure. 2. Attempt to construct testing system including existence test and correlation test. From 1994 to 2005, renminbi exchange rate level was always kept at 8.27. And it is more than two years since the deepened exchange reformation. There has been some simple qualitative researches in this area, but few quantitative models has been constructed for empirical research. Trying to use Granger Causality test, and Structural Vector Autoregressions(SVAR), this dissertation constructs existence test and correlation test for risk in China's transitional economy. These methods presented here are simple and valuable in practice.3. Structure warning evaluating index system of risk on renminbi interest rate and exchange rate, and utilize the methods, such as fuzzy mathematics theory and gray systematic theory. With China faster opening-up to the outside, the authority has paid more attention to risk on linkage mechanism of renminbi interest rate and exchange rate. Nevertheless, the research about it has been almost absent in this field. The main creative work includes: a) Through carrying out systematically analysis to the factors influencing risk on renminbi interest rate and exchange rate in open economy, this dissertation combines indexes rationally, basing on the work of Blejer,Schummacher(1999) and Kaminsky(1998); b) Introduce the analytic hierarchy process(AHP) in order to formulate weight of each warning indicator. Warning indicator weights reflect relatively important degrees in risk evaluation. Combining qualitative analysis with quantitative analysis, AHP can enhance efficiency of risk evaluation. c) To evaluate risk on linkage mechanism is a information-incompleting, complicating, multifactoring, and comprehensive decision progress, this dissertation provides evaluating models basing on fuzzy mathematics theory and gray systematic theory separately. By adopting improved FCE method, this dissertation provides the fuzzy judging algorithm of risk level. By adopting the gray systematic theory, this dissertation provides the gray correlated model (GCM).4. From the visual angle of risk prevention, this dissertation puts forward three constructive suggestions in China's future complete market economy: a) Perfect monitoring system of cross-border capital flow; establishing interest rate corridor and setting up exchange stabilization fund. b) Establish interest rate corridor; c) Set up exchange stabilization fund. All this provides a good frame for risk control.This dissertation is carried out for about four years, mainly with the help of many scholars. For it is hard to make conclusion deeply for lack of data and relative material, and restricted by environment and personal ability, this dissertation has many limitations, which should be studied seriously both in theory and practice in the future.
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