Empirical Studies Of Interest Rate Parity Theory In China

With the constant expansion of China's opening up, the frequent exchange rate fluctuations tend to become the economic field research's priority and difficult problem in every country that how to apply exchange rate decision theory to analyze one national exchange rate changes. Through different theories of Determination of Exchange Rates, this essay reviews the linkage between exchange and interest rate. With Chinese market-oriented exchange and interest rate and capital flow, it's feasible that Chinese financial market development background is similar to interest rate parity theory's application background and applying interest rate parity theory to analyze Chinese's exchange rate.This essay begins with the Sino-America interaction between the interest rate and exchange rate.With the description of out interest rate policy, exchange rate policy and capital control policies and macro-economic background, it systematically analyzes the transmission mechanism of interest rate parity applicability in China. According to Chinese current financial background, this essay further modifies interest rate parity model for the introduction of the elasticity of supply of funds. Based on the shibor interest rate and libor interest rate from October2006 to August2010 and the single-root test and cointegration test toward the long-term rise of the RMB (paste) water rates and spreads the relationship, the model ECM comes out to further explore the variables influence in a short and long run. Therefore, the government proposes to promote the process of marketizaion the interest rates, deepen the RMB exchange rate formation mechanism and optimize the interest and exchange rate policies to create opportunities for the interest rate parity to transmit well, gradually opening the china capital markets.