An Analysis On The Dynamic Relationship Between The Rmb Exchange Rate And Interest Rate

With Chinese financial opening and RMB internationalization carrying on, the study on the correlation between RMB exchange rate and interest rate is more important. Interest rate policy is the basis to achieve internal equilibrium, and exchange rate policy is to the key to achieve external equilibrium. Interest rate policy and exchange rate policy coordination is the premise to achieve equilibrium. Coordinating the exchange rate policy and the interest rate policy can reduce harms which the monetary disturbance brings, and realize the internal and external balance.This paper selected some exogenous variables, which significant in the statistical sense through the classical research documents. Under this basis, choose RMB against the U.S. dollar nominal exchange rate, Shanghai interbank offered rate between7days as endogenous variables, and we study the dynamic relationship between the RMB exchange rate and interest rate by applying a bivariate VAR-GARCH model and using DCC analysis, a multivariate GARCH model.The results show that the systemic changes of the dynamics between exchange rate and interest rate have taken place after exchange rate reform. Before the RMB exchange reform, the correlation is positive, while it is negative after the reform. The greater flexibility of RMB exchange rate is stabilizing the volatility of interest rate in the long run, however actually exacerbates the volatility of interest rates in short run. Finally, according to empirical results and examine the causes, this paper proposes recommendations and concrete measures to strengthen China's interest rate policy and exchange rate policy coordination.