Research On Linkage Effect Between China’s Monetary Policy And Exchange Rate Policy

On July 21 st, 2005, the People’s Bank of China announced the reform on RMB exchange rate policy, in which “a managed floating exchange rate policy based on market supply and demand with reference to a basket of currencies” was carried out. After the reform, the RMB exchange rate volatility has increased gradually. On March 15 th, 2014, the central bank announced that the exchange rate would be expended to 2%, and it caused a new discussion in academic field. Current scholars from China and abroad has focused a lot on assessed the new condition of effectiveness and independence of monetary policy, but there was less research on the interactive relationship between them. Therefore, this research has great theoretical and practical significance on achieving an internal and external balance, as well as, a more stable, healthy and sustainable development in China’s economy.Then, based on related theories, mechanism analysis and status quo. This paper takes monthly data after the reform as sample, and use cointegration test, granger causality test,impulse response analysis to make empirical research about the linkage effect of China’s monetary policy and exchange rate policy.The empirical results are as follows:(1)The cointegration test shows that It has a long-run equilibrium relationship between monetary policy and exchange rate policy. It has negative correlation between exchange rate and money supply, and It has positive correlation between interest rates and exchange rate.(2)Monetary policy and exchange rate policy has linkage,but only the exchange rate is the one-way granger reason for the money supply. It’s because that China’s financial market is not perfect, exchange rate and interest rate is not decided by market and our capital is limited and so on.Based on the granger causality test, this paper takes monthly data before and after reform as samples, and uses VEC model to make Empirical Research. The result shows that the sensitive of money supply to foreign exchange reserves increase after the reform. So It has an increase in the sensitivity of linkage between China’s monetary policy and exchange rate.Therefore, this paper puts forward some suggestions to promote coordination between the monetary policy and exchange rate policy, including improving financial market environment, promoting market-oriented of exchange rate and interest rate, and coordinating the regulation between monetary policy and exchange rate policy.