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Does the Chinese interest rate follow the US interest rate?

✍ Scribed by Yin-Wong Cheung; Dickson C. Tam; Matthew S. Yiu

Publisher
John Wiley and Sons
Year
2008
Tongue
English
Weight
181 KB
Volume
13
Category
Article
ISSN
1076-9307

No coin nor oath required. For personal study only.

✦ Synopsis

Abstract

One argument for floating the Chinese renminbi (RMB) is to insulate China's monetary policy from the US effect. However, we note that both theoretical considerations and empirical results do not offer a definite answer on the link between exchange rate arrangement and policy dependence. We examine the empirical relevance of the argument by analysing the interactions between the Chinese and the US interest rates. Our empirical results, which appear robust to various assumptions of data persistence, suggest that the US effect on the Chinese interest rate is quite weak. Apparently, even with its de facto peg to the US dollar, China has alternative measures to retain its policy independence and de‐link its interest rates from the US rate. In other words, the argument for a flexible RMB to insulate China's monetary policy from the US effect is not substantiated by the observed interest rate interactions. Copyright Β© 2007 John Wiley & Sons, Ltd.

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