The Reconciliation Between Exchange Rate Liberalization And Interest Rate Liberalization

Interest rate is an important factor in the forming of exchange rate. And there is a kind of relationship between exchange rate and interest rate liberalization. Without the liberalization of interest rate, the real exchange rate liberalization will not exist. But in our country, the lagging of interest rate liberalization has great effect on the exchange rate liberalization. This dissertation will focus on this problem and hopes to find out some suggestions to the reform of exchange rate liberalization.Section one describes the classical theory of the linkage between interest rate and exchange rate. Including Interest rate Parity, Flexible-Price Monetary Model, Stick-Price Monetary Model. Then this paper analysis the relationship between interest rate and exchange rate.Section two uses the data from 1980 to 2004 to testing the linkage between interest rate and exchange rate. At first, we make Regression Analysis on the model of interest-rate-parity. Then we take a further research on this linkage using Cointegration Analysis. Only to find that there is no co-relationship between them or the linkage is very weak. The liberalization of interest rate and exchange rate is not concurrent and they should be harmonized.Last section brings forward some suggestions to the exchange rate reforming. The paper summaries the experience of western countries and makes a conclusion that the institution planning, opening our capital account with steady steps, adjusting exchange rate policy, keeping up with the interest rate liberalization are very important.