Does the Chinese Interest Rate Follow the US Interest Rate?

CESifo Working Paper Series No. 1943

HKIMR Working Paper No. 19/2006

27 Pages Posted: 28 Mar 2007

See all articles by Yin-Wong Cheung

Yin-Wong Cheung

University of California, Santa Cruz - Department of Economics

Dickson Tam

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Matthew S. Yiu

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2007

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 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

JEL Classification: F33, E5, G15

Suggested Citation

Cheung, Yin-Wong and Tam, Dickson and Yiu, Matthew S., Does the Chinese Interest Rate Follow the US Interest Rate? (March 2007). CESifo Working Paper Series No. 1943, HKIMR Working Paper No. 19/2006, Available at SSRN: https://ssrn.com/abstract=976580 or http://dx.doi.org/10.2139/ssrn.976580

Yin-Wong Cheung (Contact Author)

University of California, Santa Cruz - Department of Economics ( email )

Engineering 2, Department of Economics
University of California
Santa Cruz, CA 95064
United States
831-459-5077 (Fax)

Dickson Tam

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

3 Garden Road, 8th Floor
Hong Kong
China

Matthew S. Yiu

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

55/F Two IFC
8 Finance Street, Central
Hong Kong, HK
China
+852 2878 1974 (Phone)
+852 2878 7006 (Fax)

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