THE INTEREST RATE - EXCHANGE RATE NEXUS IN CHINA: A DCCA CROSS-CORRELATION COEFFICIENT WITH SLIDING WINDOW APPROACH

Muntazir Hussain¹, Irfan Saleem¹ and Usman Bashir²

¹Sohar University, Faculty of Business, Oman
²University of Bahrain, Bahrain

This study aims to investigate the dynamics of the interest rates and exchange rates during the pandemic-induced crisis in the Chinese economy. In the study, rolling window detrended cross-correlation analysis (DCCA) was used. The DCCA coefficient was extracted based on detrended fluctuation analysis (DFA). The data used in the study are the daily data of the period from 2/1/2019 to 7/5/2021. The results obtained in the study suggest the presence of positive cross-correlation between China’s interest rate and exchange rate after the COVID-19 pandemic, and they also report the existence of weak positive cross-correlation during the initial days of the pandemic. However, the weak positive cross-correlation became stronger over time. Higher interest rates are associated with higher exchange rates after the COVID-19 pandemic. The results of the research study have policy implications in that conventional higher interest rates introduced to defend the exchange rate might fail during pandemic-induced crises.

Keywords: DCCA, DFA, COVID-19

JEL Classification: E44, E52, C22