Study On The Linkage Between RMB Interest Rate And Exchange Rate During The Opening Process Of China

As price signal of currency market and foreign exchange market, interest rate andexchange rate have an effect on each other in the open economy, which is very important tothe fiancial stability and macroeconomic regulatory of one country. As economic systemreform goes deeper and market opens up further, the linkage between RMB interest rateand exchange rate has become a focus in both theory and practice field.On the basis of literature review and theory study, this paper uses both qualitativeanalysis method and quantitative analysis method, sums up the interaction effect betweeninterest rate and exchange rate under market condition and non-market condition.According to the actual performance, the paper makes a intuitive judgment about RMBinterest rate and exchange rate. Besides, the paper comprehensively uses vector autoregression model、unit root test、cointegration test、Granger causality test、impulse responseand variance decomposition to verificate the linkage between RMB interest rate andexchange rate, and test how long and how much the linkage exits, the paper founds thatwith the market opens up further more, there is an improvement of the linkage betweenRMB interest rate and exchange rate to a certain degree, though it is still weak overall.Finally the paper analyses the reason of the empirical results, and aslo gives somesuggestions to improve the relationship between RMB interest rate and exchange rate.In order to find the reason which causes the linkage weak, the paper considersfollowing aspects comprehensively, including the effect of market interest rate、exchangerate formation、capital flow, and the current policy collocation, which is composed by thestable exchange rate policy and interest rate policy used to solve both internal and externalbalance problem. Lastly, in order to improve the linkage between RMB interest rate andexchange rate, the paper tries to give policy suggestions from short term and long termperspective separately.