Lessons To China From The Transmitting Mechanism Between US Dollars' Interest Rate And Foreign Exchange Rate

This paper focuses on the transmitting mechanism between US dollars' interestrate and foreign exchange rate and its lessons to China's foreign exchange reform.On one hand, according to the analysis on America's foreign exchange rate andinterest rate policies from 1990 to 2005, the transmitting mechanism between interestrate and foreign exchange rate has been realized soundly in the money market andforeign exchange market, and foreign exchange rate and interest rate policiescooperated effectively to serve the national economic objectives together, which aremainly to stable the national economic growth rate and low the inflation rate andunemployment rate. American government assumes a let-along attitude on the foreignexchange fluctuations and never sacrifices national economy solely for the objectiveto stable the foreign exchange rate, which is a good lesson to the constitution andimplementation of China's foreign exchange rate and interest rate policies after theforeign exchange rate reform.On the other hand, according to the analysis on the interaction between foreignexchange rate and interest rate policies of China after 1994, currently the correlationbetween RMB's foreign exchange rate and interest rate is relatively weak, which hashampered the functioning of money transmitting mechanism to some extent. Themajor reasons are the unsoundness of the financial market and in-marketization of the"Double Rate" formulation mechanism. In the new-round foreign exchange ratereform, the government should pay much attention to the supporting reform on theinterest rate mechanism and foreign exchange rate mechanism. First, the reform oninterest rate marketization should be fastened, and the transmitting mechanismbetween interest rate and foreign exchange rate should be established. Second, thegovernment should strengthen the cooperation between foreign exchange rate andinterest rate policies...