An Analysis On The Interaction Effect Between Real Interest Rate And Real Effective Exchange Rate Of RMB

With Chinese financial opening and RMB internationalization carrying on, the study on the correlation between RMB exchange rate and interest rate is more important. Interest rate and exchange rate respectively represent the price of money on monetary market and foreign exchange market, and they both are important levers on adjusting economy and leading resource allocation, and also important tools on domestic and foreign monetary policies. There are both high theoretic and practical values of studying on the interaction effect of the two rates. However, at present, studies are still focus on the one-way effect from interest to exchange rate, rarely put emphasizes on the interaction effect of the two rates, and there exists limitation on the indexes, etc.This thesis chooses real rate and real effective exchange rate as main indexes. Johansen co-integration test and vector error correction model are adopted to analyze the long-term equilibrium relationship between us dollars interest rate and exchange rate and also the short-term dynamic adjust process. Granger causality test, impulse response functions and variance decomposition are also used to remake the study more overall and systemic.The empirical result indicates that in long-term, there is a co-integration between the real interest and real exchange rate, with the help of nominal exchange rate and interest rate analysis, and long-term equilibrium and mutual Granger because relationship exists between them, they make the effect rapider. Expectation plays a remarkable role in the interaction effect, and it is even more remarkable than the effect which from interest changes to capital movement and asset exchange. In short-term, we introduce the model of GARCH. And this indicates that people pay much attention on economy, at least they are sensitive on interest changes, but for, the author draws a figure of influence route based on the information supplied by the vector error correction model. Economic factors strengthen the interaction effect between RMB real interest rate and exchange rate, but because of the reason that there is a lagging effect in China money market construction and the interest has not being completely market wised, the indirect interaction relationship is not so obvious.