Integration Test of HK dollar and RMB and Its Interest Rate Linkages An Empirical Study Based on Structural Change

Abstract

Taking into account the possibility of structural changes led by RMB exchange rate reform, the paper tests the data of interest rate relationship between Hong Kong and Mainland China and U.S. from July 1996 to October 2009, and finds that there is different data structure before and after the July 2005 reform of the RMB exchange rate. So, in this paper, UIP-PPP-RIP model is used for testing empirically the monetary integration between Hong Kong and Mainland before and after the exchange rate reform, and it is concluded that: before the exchange rate reform the parity existed between Hong Kong and Mainland in the financial market, commodity market and real capital market, then after the exchange reform the parity disappeared. In addition, dynamics analysis of the long and short term interest rate relationship between the three locations shows that: U.S. interest rate change effect on Hong Kong interest rate is larger than Mainland interest rate change effect on Hong Kong interest rate, but this effect after the exchange rate reform became smaller. The policy significance is that monetary integration does not in appear Hong Kong and Mainland after the exchange rate reform, but the RMB interest rate impact on the Hong Kong dollar interest rate is gradually increased.