An Analysis On The Linkage Between Interest Rate And Exchange Rate Of RMB

Since the opening and reform policy, Chinese economy has changed to developa new finacial pattern. As the influnce of “visible hand” and the “invisible one”, theChinese government and market all together take the lead to manage the economy. Inthe year1994, China made a revolution on exchange govern structure, which lies inadapting to the international trade. In the year1996, China carrys out theconvertibility under current account. All these lead the relationship in interest rateand exchange rate from theory to reality.Interest rate stands for the price of the money market, which is an importantvariable to the internal.exchange rate stands for the price of the exchange market,which is an important variable to the external.Both of them are levers of a country,and play an important role to guiding the resource to be allocated efficiently, tocontrol inflation, to keep the balance of economy inside and outside and to keep awatch on financial risks. In one country, the interest rate and exchange rate areunique and irreplaceable. The linkage between interest rate and exchange rate givesexpression to the communication and reflection of internal and external economy.Nowadays, the financial market in China and is becoming more and more matureand many financial policies are becoming more and more loose. As to the financialinstruments are becoming more and more, it is really risky to a country’s economy.The structure of china’s economy is still exchange rate control and capitalincomplete flow. In this condition, it is easy to lead to conflict between economydeveloping pattern and economy running environment. To get more development to china’s economy, we must do some economy reformations.This paper is writing on today’s environment and is expected to investigate theLinkage between interest Rate and Exchange Rate of RMB. This paper is mainlyusing Eviews to do demonstration analysis. The measure method is unit-root test,Johansen co-integration test, OLS, Grange,impluse response function and variancedecomposition and so on.According to the study, we find that there is not only linearrelationshipin between the two variables, but also long-term co-integration betweenthem. Although the periodism of the two variables is not so obvious, the two put up asensitive reaction to each other’s fluctuation. At the same time, the expression frominterest rate to exchange rate is stronger, and the fluctuation of interest rate makesmuch more influence to the exchange rate.