Research On The Linkage Between Exchange Rate And Interest Rate Of RMB

Under the trend of economic globalization, many countries have joined the teamof opening capital accounts and economy to make the free flow of capital and interestrate marketization. However, due to the lack of experience in reform, many countriesare not aware of the linkage between exchange rate and interest rate. Because of thelack of coordination mechanism of exchange rate policy and interest rate policy, it isultimately to cause financial crisis. At the end of2001, China joins WTO formally,through strengthen and broaden the market economy for the breadth and depth ofChina, with a more active attitude to participate in economic globalization. Exchangerate as foreign price、interest rate as its national price, have become the core ofmacro economic variables. With the international environment and the relationshipbetween economic variables complicate, the central bank continued to pay closeattention to the linkage between exchange rate and interest rate of RMB, maintain thepolicy coordination, to maintain Chinese economic and financial security and newsituation of sustainable economic development are of great significance.This paper uses the1994January to2011August’s the RMB against the U.S.dollar exchange rate per month (ER) and china commercial bank’s the one-yeardeposit rate (IR) monthly data, using ADF unit root test, Cointegration test, Grangercausality test and other methods in econometrics to study on the linkage betweenexchange rate and interest rate of RMB. Through empirical analysis, the Linkagebetween Exchange Rate and Interest Rate of RMB is not significant.This paper altogether is divided four parts: the first part is an introduction. Thispart mainly discusses the research significance and the domestic and foreign aboutexchange rate and interest rate linkage relationships on the literature review, and givesthe main content and structure; the second part is the first chapter. This part containsthe theory of interest rate parity、exchange rate determination theory of the capitalmarket、the Mundell-Fleming model, these important theories are the basis of thepaper. The third part is the second chapter and the third chapter. The second chapteranalyses the linkage between exchange rate and interest rate of RMB from the macro-level. The third chapter using the micro data analyses the linkage between RMB exchange rate and interest rate. The two chapters provide realistic basis for thefollowing questions and draw conclusions; the fourth part is the fourth chapter and thefifth chapter. The fourth chapter pointed out the problem of linkage transmissionmechanism of Exchange Rate and Interest Rate of RMB. The fifth chapter proposespolicy coordination to improve the linkage between exchange rate and interest rate ofRMB.At present, the linkage between exchange rate and interest rate of RMB existsmany problems, we should keep the financial security, continue to promote theexchange rate and interest rate marketization reform, in a robust manner to achievethe smooth and coordination the linkage between exchange rate and interest rate ofRMB, to achieve Chinese economy Sustained, rapid growth targets.