Premium
Does the Chinese interest rate follow the US interest rate?
Author(s) -
Cheung YinWong,
Tam Dickson C.,
Yiu Matthew S.
Publication year - 2008
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.349
Subject(s) - renminbi , economics , argument (complex analysis) , interest rate , china , exchange rate , monetary policy , international fisher effect , interest rate parity , fisher hypothesis , relevance (law) , monetary economics , real interest rate , law , political science , biochemistry , chemistry
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 © 2007 John Wiley & Sons, Ltd.