A Study On The Interest Rate-exchange Rate Linkage Mechanism Of China

Both interest rates and exchange rates are important factors influencing the economic development of a country and an important means of regulating economic policies.The role of interest rates is mainly reflected in the balance of the domestic economy,when a country’s economic development is too fast,accompanied by rising inflation,it is necessary to raise interest rates,increase deposits to reduce loans,thereby reducing economic growth rate.The role of exchange rate mainly lies in the balance between countries and countries,and even in the import and export trade,the exchange rate reduction will benefit a country’s exports and inhibit imports,from the import and export trade in this area to stimulate economic development.At the same time as the rapid economic development,interest rate and exchange rate adjustment should not only be fixed in a certain dimension,the relationship is similar to "pull the whole body" : when interest rates fluctuate,the exchange rate will be corresponding appreciation or depreciation.At this point,the interest rate-exchange rate linkage mechanism will be through the interest rate,exchange rate adjustment,to maintain stable economic development.In fact,interest rates and exchange rates can also interact with each other while regulating the economy.Under the floating exchange rate system,when the nominal interest rate of a country’s trading partners rises,the country’s exchange rate depreciation,which will stimulate exports and currency circulation,increase the rate of inflation.Eventually the country’s interest rate rose.This is only one aspect of interest rate and exchange rate,because interest rate-exchange rate linkage can better regulate the economic balance,promote economic development,making a lot of scholars do some research about it.Based on the theoretical analysis and the actual data validation,this paper analyzes the theory of the interaction between interest rate and exchange rate,and makes a general description of the development of interest rate and exchange rate system.Then it adopts the method of econometrics,Model and the empirical analysis of China’s interest rate and exchange rate data from 2010 to 2016.The interaction between interest rate and exchange rate has come to the conclusion that the linkage mechanism between interest rate and exchange rate is not obvious.And puts forward policy suggestions such as deepening the degree of marketization of interest rate,expanding capital project development and deepening exchange rate mechanism reform,aiming at the imperfection of linkage mechanism.These proposals are good for making Chinese economy healthy and stable.