Study On The Correlation Between Renminbi Exchange Rate And Interest Rate

With Chinese financial opening and RMB internationalization carrying on, the study on the correlation between RMB exchange rate and interest rate is more important. Coordinating the interest rate policy and the exchange rate policy can reduce harms which the monetary disturbance brings, and realize the internal and external balance. Along with our country economy's marketing degree enhancing, and the opening up of economic and finance, the correlation between the interest rate and the exchange rate will strengthens gradually.This paper begins with some theories of the linkage between exchange rate and interest rate. Under the analysis framework for exchange rate and interest rate coordination policy in open economy, the paper has carried on some theoretical analysis and the empirical study. The paper screens the representative theoretical and empery models through the classical research documents. On the base of the theories, the paper gives a framework which can analyze the results of monetary policy and exchange rate policy, and chooses the Renminbi real effective exchange rate, the China-US real interest rate difference and other related economic variables to carry on the Vector Autoregressive Model analysis. The paper testifies that there are some relationships and inter-actions among the variables and also makes VECM model and the response to the VAR impact to find the dynamic linkages among the variables. On the basis of that, this paper has further made the theoretical analysis for Renminbi nominal exchange rate and the interest rate linkage, using the methods of conintegration regression and Vector Autoregressive Model analysis.Through the study above, the paper shows that: although correlation between RMB exchange rate and interest rate is weak during the years, CHIBOR or money supply still has some positive effects to RMB REER, and we must carefully hold the range and strength of the money supply increase. With the help of nominal exchange rate and interest rate analysis, the paper finds that there is some alternate recurrent linkage between RMB nominal exchange rate and interest rate, as"adjustment-increase-adjustment-decrease-adjustment"responses and when one is increase or decrease, the other is in adjustment. The paper points out some suggestions that we should respect the spontaneous action of market energy when the macro-economy does some adjustments to come to its internal and external equilibrium, and harmonize the RMB exchange rate policy and interest rate policy.