JACIII Vol.19 No.3 pp. 456-464
doi: 10.20965/jaciii.2015.p0456


Coordination of Monetary and Exchange Rate Policy in China: Market Interest Rate Approach

Bing Xu*, Qiuqin He*, and Xiaowen Hu**

*Research Institute of Econometrics and Statistics, Zhejiang Gongshang University
18 XueZheng Road, Xiasha University Town, Hangzhou 310018, China
**School of Economics and Management, Anhui Normal University
1 Beijing East Road, Wuhu, Anhui 241000, China

December 15, 2013
March 22, 2015
Online released:
May 20, 2015
May 20, 2015
Taylor Rule, market interest rates approach, path identification

We propose a unique time-varying identification approach to the market interest rate based on Taylor Rule for coordinating the monetary and exchange rate policies. The significant differences exist between real and market interest rates — 2001 and 2009 are high real interest rates, and 2004-2005 and 2010-2012 low real interest rates — that identify monetary and exchange rate policy conflicts in China. These conflicts derive from the indirect effect of monetary factor through interest rate inertia and expected output gap in 2001; the indirect effect of exchange rate factor through interest rates and inflation inertia in 2004-2005; the direct effects of monetary and the exchange rate factors and the indirect effects through interest rate and inflation inertia, and the expected inflation and output gap since 2009. Our empirical results provide decision support for the monetary and exchange rate policy for reforming Chinese market interest rates.

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Last updated on Mar. 24, 2017