| The relationship between interest rate and exchange rate has been the focus issue in international finance research. For decades, the market degree of China’s interest rate and exchange rate has been limited, and they are lack of linkage and interaction. However, with the full liberalization of financial industry and the ever-increasing procession of interest rate and exchange rate market reforms, especially with the entry to WTO, the linkage and interaction of interest rate and exchange rate has been greatly strengthened. Interest rate and exchange rate play the role of main-operating indicators respectively in the currency market and foreign exchange market, and both of them are vital tool of country monetary policy. Today, with the trend of trade globalization and economic integration, studying the linkage and interaction of China’s interest rate and exchange rate has practical significance for the coordination of interest rate and exchange rate policies and the balance between internal and external economy.Firstly, this paper systematically analyses the interest rate and the exchange rate linkage mechanism basing on three elementary theories of the general mechanism, the interest rate Parity model, and the Mondale-Fleming model. Secondly, this paper further discusses the historical process of the RMB interest rate policy and exchange rate policy evolution, then summarizes a few conflicts between RMB interest rate policy and exchange rate policy and explicates the importance of coordination. Next, combined with the realistic environment, this paper chooses the representative index of interest rate, exchange rate and other economic variables; and makes an empirical analysis of RMB interest rate and exchange rate linkage effect by SVAR model. This paper makes empirical studies based on the monthly data from the July2005to June2012. The empirical process includes two parts:the first part is based on two variables; the second part is based on multi-variables. The results showed that whatever short-term or long-term, the linkage relations between RMB interest rate and exchange rate is not obvious. The multi-variables model by introducing foreign exchange reserves and monetary supplies didn’t increase the linkage relation. And the transmission mechanism of interest rate and exchange rate is not sound, the linkage suffered serious obstacle. Lastly, according to the empirical results and reasons analysis, this paper mainly gives the following policy suggestions:promote the marketization of interest rate fast and realize the real interest rate market gradually; deepen the exchange rate mechanism reform, construct an extensive and in-depth exchange market, and promote a more flexible RMB exchange rate mechanism steadily; relax the capital controls gradually, continue to realize the full liberalization of capital account and RMB freely convertible; strengthen the coordination of interest rate policy and exchange rate policy. |
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