EconPapers    
Economics at your fingertips  
 

On the link between the exchange rates and interest rate differentials in China: evidence from an asymmetric wavelet analysis

Deng-Kui Si (), Xiao-Lin Li () and Xinyu Ge ()
Additional contact information
Deng-Kui Si: Qingdao University
Xiao-Lin Li: Ocean University of China
Xinyu Ge: Soochow University

Empirical Economics, 2020, vol. 59, issue 6, No 13, 2925-2946

Abstract: Abstract This paper adopts wavelet analysis to explore the time–frequency comovement and causality between the exchange rates and the interest rate differentials in China (compared to the USA) over the period from February 1999 to March 2018. While the existing literature in general treats the relationship between the two variables as being symmetric, this paper attempts to detect possible asymmetric patterns by extending the standard wavelet analysis to an asymmetric analysis. In addition, given that the relationship might be affected by exchange rate expectations and foreign exchange interventions, we further employ the partial wavelet tools to filter out the effects of the two controlled variables. The results show that the general pattern of the comovement and causality does not change. The comovement is intensified at the low frequency after the exchange rate reform in 2005. Moreover, exchange rates are found to positively comove with interest rate differentials, and the former leads the latter. More importantly, we provide robust evidence of meaningful asymmetry and substantial time and frequency variations in the comovement and causality between the two variables. These findings provide important implications for improving the transmission of monetary policy in China.

Keywords: Exchange rate; Interest rate differential; Wavelet analysis; Monetary policy; Asymmetry (search for similar items in EconPapers)
JEL-codes: F31 E43 E58 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://link.springer.com/10.1007/s00181-019-01803-4 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:empeco:v:59:y:2020:i:6:d:10.1007_s00181-019-01803-4

Ordering information: This journal article can be ordered from
http://www.springer. ... rics/journal/181/PS2

DOI: 10.1007/s00181-019-01803-4

Access Statistics for this article

Empirical Economics is currently edited by Robert M. Kunst, Arthur H.O. van Soest, Bertrand Candelon, Subal C. Kumbhakar and Joakim Westerlund

More articles in Empirical Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().

 
Page updated 2020-12-26
Handle: RePEc:spr:empeco:v:59:y:2020:i:6:d:10.1007_s00181-019-01803-4