Chinese and the U.S. Interest Rates and Exchange Rate Relation and Transmission Mechanism: Data 2002 to June 2008

Based on whether the Chinese and the U.S. interest rates and exchange rate agreeing with covered interest rate parity theory or not, Granger causality test and co-integration test were utilized to analyze Chinese and the U.S. interest rates and exchange rate from the perspectives of the relation and the transmission mechanism of them. The research found that, without regard to institution and economic environment factors, the interest rate parity theory was nearly tenable; when the effects of the institution and economic environment factors was comparatively strong, interest rates of China and the USA influenced each other directly. Otherwise, they influenced each other by exchange rate. Finally, conclusions and policy suggestions were pointed out.