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In an open economy, to promote rapid, sustained and stable development,safeguarding the security of economic and financial markets,and to pursuit of balanceddevelopment of the macroeconomic is the goal of economic development around theworld.in order to achieve this economic objectives, interest rates and exchange rateadjustment plays an essential role. Accompanied by a deepening of openness, monetarypolicy as an important policy tool, has been more and more attention.At the same time,there is some uncertainty in formulating and implementing monetary policy, particularly inan open economy, monetary policy operations have greater uncertainty and risk. Based onthe above considerations, we study the fluctuations mechanisms and effectiveness of RMBinterest rate and exchange rateunder conditions of uncertainty.Firstly, we describe and summarize the measurement methods of RMB interest rateand exchange rate fluctuations mechanism, and then we describe the effectiveness of RMBinterest rate and exchange rate and the linkage between them. On this basis, we willmeasure the fluctuations of RMB interest rate and exchange rate, first, we constructVasicek model measure the fluctuations of interbank interest rate of different term structure,and we found there are mean reversion characteristics in interbank interest rate of differentterm structure.Secondly, to examine the interest rate regime switching characteristics, we extend theVasicek model, and construct regime switching RS-Vasicek model, which can identify andmeasure Nonlinear fluctuation mechanism and the mechanism of dynamic regimestransition of interbank interest rate.The results showed that, compared with the Vasicekmodel, RS-Vasicek model not only can reflect mean response characteristics of the marketinterest rates of different maturities, but also to identify low volatility and high volatilityregime different market term structure of interest rates. And compared with in the highvolatility regime, mean reversion rate of interest rate in low volatility regime is faster, and the Duration and thehalf-lifeis longer.In this paper, on the base of describing Balassa-Samuelson effect and the hypothesisof interest rate parity, we analysis the influencing factors and the movements of the realexchange rate by Cointegration Vector Auto-Regression model. And we find that in thelong run, there is between the two countries Balassa-Samuelson effect, and from the shortterm, the real exchange rate between China and U.S. is affected by many factors, includinginflation, real exchange between the two countries, the differences of goods sector pricebetween the U.S. tradable goods sector and non-tradable goods sector and seasonal factors.In addition, on the base of identify and test fluctuations mechanisms of interest rateand exchange rate, we also construct a Vector Auto-Regression model measure linkagemechanism of interest rate and exchange rate. And we found that in the short term,exchange rate movements do not cause significantly changes in interest rates, while in thelong term, exchange rate movements may cause changes in interest rates in the samedirection, which is also associated with the previous study’s conclusions, which also showsthat in our country, the transmission mechanism of the exchange rate affecting interestrates is relatively efficient.Finally, we study the feedback mechanism of interest rates. First, we compare thebenefits of central banks in the frame of monetary policy rules and discretion, then we testinterest rules including exchange gap of central bank of china, considering loss function ofcentral banks maybe include exchange gap. We find that China’s monetary authoritiesconduct monetary policy not only concerned about the output gap and inflation gapchanges, but also concerned about movements of exchange rates, the monetary authoritieswill raise interest rates generally when the exchange rate gap is positive, and the monetaryauthorities willlow interest rates generally when the exchange rate gap is negative.
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