Theoretical Analysis And Empirical Research On Linkage Effects Of Interest Rate And Exchange Rate

With the trend of trade globalization and economic integration, the impact from movements of a country's interest rates and exchange rate will be more widespread. As two powerful tools that regulating the money market and foreign exchange market, interest rate and exchange rate are main methods of central bank's monetary policy, and they have a strong linkageeffects. With the full liberalization of China's financial industry and the development of internationalization process of RMB, studying the linkage effects of interest rate and exchange rate has practical significance for the coordination of China's interest rate and exchange rate policies and the balance between internal and external economy.This paper analyzes the linkage effects and transmission mechanism of interest rate and exchange rate in the open economy through classical economic theories and models, and illustrates the specific factors that restrict the linkage effects of interest rate and exchange rate. Then, it analyzes and compares China's linkage situation since 1994 in two aspects: nominal interest rate-exchange rate and real interest rate-exchange rate, and educes the suitability that the theoretical model explains China's linkage effects of interest rate and exchange rate respectively. In the empirical research, it selects real interest rate, real effective exchange rate and other economic variables as indicators, and constructs reasonable empirical models by means of econometric methods. The empirical process includes two parts: the first part is based on two variables; the second part is based on multi-variables. In order to more truly reflect the linkage effect of interest rate and exchange rate, each part of the empirical research analyzes the data before and after the reform of exchange rate respectively, and draws comparative conclusions. Empirical conclusions show that China's linkage effect of interest rate and exchange rate is very weak, although it has been improved to a certain extent after the reform of exchange rate. Interest rate and exchange rate of RMB can not transmit information effectively between each other, and can not provide accurate market information for the macro-economy, so the financial risk is accumulated and it is not conducive to economic stability and healthy development. At last, this paper puts forward the corresponding recommendations on policy according to China's specific conditions.