Does the Chinese Interest Rate Follow the US Interest Rate?
Dickson Tam and
Matthew S. Yiu
No 1943, CESifo Working Paper Series from CESifo Group Munich
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 analyzing the interactions between the Chinese and 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.
Keywords: policy dependence; interest rate interactions; exchange rate regime (search for similar items in EconPapers)
JEL-codes: E50 F33 G15 (search for similar items in EconPapers)
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Journal Article: Does the Chinese interest rate follow the US interest rate? (2008)
Working Paper: Does the Chinese Interest Rate Follow the US Interest Rate? (2006)
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