An Empirical Analysis on the Interest Rate and Exchange Rate Linkage Mechanism Based on VAR Model

摘要

As interest rate and exchange rate are two powerful tools for macro-economic adjustment, the research on the linkage mechanism between them is the premise of fair use of interest rate policy and exchange rate policy. This paper developed a VAR(3) model, through the impulse response function and variance decomposition analysis to quantify the linkage between the RMB interest rate and exchange rate. The empirical results show that the degree of influence by the other party is not great overall; however, comparing the relative values, we find that the influence interest rate impact on exchange rate is greater than the influence exchange rate impact on interest rate, which can provide us a basis to push forward financial reforms with focus, progressive, and continuing.