Study On The Interest Rate And Exchange Rate Linkage Mechanism Of China

Interest rate as the price of domestic currency and exchange rate as the price offoreign currency, they can't be ignored in the macro-economic process of one country.Along with the full liberalization of China's financial industry, and the convertibility ofRMB pushing gradually, the relationship among the money market, capital market andforeign exchange market is more and more close, which make interest rate andexchange rate interact influence each other, construct a dynamic feedback system.Therefore, do research on the correlation and patches between exchange rate andinterest rate and discuss the influence and dynamic relationship have practical importantsignificance on coordinating the interest rate policy and exchange rate policy, onmaintaining economic and financial security of of one country, on promoting economicdevelop stability and achieving internal and external equilibrium. This paper analyzesthe theoretical and realistic significance and background of the interest rate andexchange rate linkage mechanism of China, researches results of the scholars both athome and abroad systematically comb and remarks them, which lays a theoreticalfoundation of this study. On the basis analysis of the interest rate and exchange ratelinkage mechanism, we describe the one-way influence the channel between interestrate and exchange rate separately, further analyze main factors influence of the interestrate and exchange rate linkage mechanism in detail, including financial market dynamicopenness, interest rate marketization level, exchange rate system selection, the centralbank policy targets and public expectations and political factors. This will make afoundation for the empirical analysis introduces relevant variables.The body of this paper is the empirical part, which based on methods such as VectorAuto-regressive Model, Co-integration test, Vector Error Correction Model, ImpulseResponse Function and Variance Decomposition analyzing the relationship betweeninterest rate and exchange rate by comparison. Firstly, there are only two variables:interest rate and exchange rate. The study finds that co-integration relationship notexisted between them, but there is one-way influence, that is the influence exchange rateimposed on interest rate is more powerful than the contrary. Next on the process ofdiscussing on the nonlinear co-integration relationship between interest rate andexchange rate, we find that the co-integration relationship between them is reallyexisted and there is stickiness and "threshold effect" during the adjustment process. Atthe last is to join other economic variables for further research. Through the research on co-integration relationship among RMB exchange rate, interest rate and relatedmacroeconomic variables, to obtain the influence among them. This not only confirmsthe existence of long-term equilibrium relationship between them but also reveals thecurrent interest rate and exchange rate transmission channels exist problems such asblockade and inefficient. Finally, based on the empirical results and current status ofrelationship between interest rate and exchange rate, we propose related suggestions onenhancing the interest rate and exchange rate linkage mechanism.