Dynamic Correlation Between RMB Exchange Rate And Interest Rates

The exchange rate and the interest rate are signals that respecti-vely reflects the degree of China’s economic opening to the outside world and the internal macroeconomic health,at the same time,the ex-change rate-the interest rate transmission mechanism formed by the intrinsic link between the exchange rate and the interest rate plays a regulating and stabilizing role in achieving economic internal and external equilibrium.China has started to pay attention to the reforms of the exchange rate and interest rate and coordination of the two,in1996,our country walked out the first step of the interest rate mark-etization,in2005,China began the RMB exchange rate formation Mechanism reform.From then on,there is a closer relationship betwe-en the exchange rate and the interest rate,the relation between them plays a significant role in promoting our country’s domestic and overseas development.This paper takes the RMB exchange rate reform on July21,2005as the time cut-off point,analyze the dynamic correlation between the RMB exchange rate and the interest rate. The article researchs long term theories and short term theories referring to the relationship between the exchange rate and the interest rate, then examine the effectiveness and shortcomings of market-oriented reform of the RMB exchange rate and the interest rate, the coodination of the exchange rate policy and interest rate policy before and after the exchange rate reform,followed are the studies of the current situation of china’s the exchange rate-the interest rate transmission mechanism,on the basis the above general ana!ysis,we expand empirical analysis:The first step is using the VAR model to make a comparative study of the correlation between the exchange rate and the interest rate before and after the exchange rate reform,the second step is the comparative study of the exchange rate and interest rate volatility spillovers by establishing GARCH model and simutalneous equations model before and after the exchange rate reform,the empirical results show that the reform of the RMB exchange rate enables the linkage between the exchange rate and the interest rate enhance to a certain extent, but the conduction of the exchange rate-the interest rate transmission mechanism is still not smooth.Finally,on the ground of the problems found in the current situation analysis and empirical analysis,the article makes some recommendations on the following respects,that is the enhancemengt of the interest rate marketization,the promotion of the reform of the RMB exchange rate regime and the improvement of the exchange rate-the interest rate transmission mechanism.