AN EMPIRICAL STUDY ON SINO-US MONETARY POLICY INTERDEPENDENCE

Based on two models: a partial vector error correction model (P-VECM) and a general VECM, this paper analyzes the monetary policy interdependence between the People's Bank of China (PBC) and the Federal Reserve (Fed) for the period 2007-2011. The results show that there is a long-run equilibrium relation between the interest rates of the two currency areas, and interest rates smooth function in the two countries in monetary policy practice all reflect well. The interest rate adjustment of the PBC is based mainly on domestic macroeconomic situation, and the inflation has a greater impact than that of output gap. This paper finds no leader-follower pattern between the two central banks. These results will be significant to further understand China's monetary policy adjustment in theory and practice.