Does the Chinese interest rate follow the US interest rate?

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)53-67
Journal / PublicationInternational Journal of Finance and Economics
Volume13
Issue number1
Publication statusPublished - Jan 2008
Externally publishedYes

Abstract

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 of insulate China's monetary policy from the US effect is not substantiated by the observed interest rate interactions. Copyright © 2007 John Wiley & Sons, Ltd.

Research Area(s)

  • Exchange rate regime, Interest rate interactions, Policy dependence

Citation Format(s)

Does the Chinese interest rate follow the US interest rate? / Cheung, Yin-Wong; Tam, Dickson C.; Yiu, Matthew S.

In: International Journal of Finance and Economics, Vol. 13, No. 1, 01.2008, p. 53-67.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review