Research On The Linkage Between Interest Rate And Exchange Rate Under The Opening Financial Market In China

Under the opening financial market, Interest rate and exchange rate are the two powerful adjustments of monetary market and foreign exchange market, and are also the main method of the Central Bank monetary policy; they have strong linkage restriction relations in the utilization and the conduction process. Before the reform and opening up, China's interest rate and exchange rate had low correlation with unification formulation, centralized management and governing divisionally. However, the reform of the foreign exchange system in 1994, as well as the opening up of current account in 1996 helped making the relevance between the interest rate, the exchange rate and the international capital gradually. And also, it strengthened the interest rate and the exchange rate linkage greatly by the entry to WTO, the free convertibility of the RMB, and the close to the free flow of capital and the continuous deepening of reform of the financial system. In recent years, the several of factors have threatened the long-term stability of China's macro-economic growth seriously. Such as excessive investment growth, the pressure of RMB appreciation growing and the increasing of the foreign exchange reserve massively. In order to achieve internal and external balance, it is become a major issue that how to coordinate use of interest rate policy and exchange rate policies to achieve macroeconomic balance in China's macro-control. Furthermore, the research on the linkage between the interest rate and the exchange rate is the premise of the coordination of the interest rate policy and exchange rate policies. Therefore, it has certain foundation significance to study the linkage between interest rate and the exchange rateSo, the paper systematically introduces the interest rate and the exchange rate linkage mechanism firstly basing on four elementary theories of the general mechanism, the interest rate parity model, the Mondale - Fleming model and the generalized currency model. And then analyzes such influencing factors on the linkage between China's interest rate and exchange rate and establishes the real linkage model. What's more, it discusses China's interest rate and exchange rate linkage effect in empirically, as well as other variable degree of contribution thoroughly from the real diagnosis. Finally unifies the above research to propose the interest rate policy and the exchange rate policy reasonable coordination.The paper indicates that China's long-term interest rates on the exchange rate elasticity is small, and long and short-term elasticity coefficient is negative, this inverse relationship reveals the reflection of China's short-term capital flows is not sensitive to interest rate changes. Due to the Semi-capital market open, the interest rate change was unable through this foreign currency finance property substitution to influence exchange rate, the real interest rate was relates to the real exchange rate influence through the inflation, thereby further revealed it has conduction block tendencies between the interest rate and the exchange rate as a result of the lag of China's opening up and the exchange rate of the financial system reform and the process of marketability of interest rates. At the inflation angle, the paper draws out the necessity of coordination between the interest rate policy and the exchange rate policy, and proposes the recommendations of the interest rate and the exchange rate policy in the financial opening process.