An Empirical Analysis Based on Smooth Transition Model for the Nonlinear Adjustment of RMB Exchange Rate and Interest Rate

This paper,based on the theory framework of uncovered interest rate parity hypothesis,using based on quarterly data over the period from 1999M1 to 2011M9,applies smooth transition model to investigate adjustment between RMB exchange rate and interest rate.The results show that the linkage between RMB exchange rate and interest rate is nonlinear and asymmetric.When the foreign interest rates below the threshold level,the impact of the exchange rate changes shocks on interest rates is relatively large;when foreign interest rates higher than the threshold level,the exchange rate changes on interest rates has little effect;the impact of the exchange rate changes shocks on interest rates is relatively less;when foreign interest rates near the threshold value the impact the exchange rate changes shocks on interest rates smooth transition between the two mechanisms.