Interest rate, unemployment rate and China's exchange rate regime

The purpose of this paper is to discuss the change in China's exchange rate regime during the 2001-2009 period, when both the pegged and floating exchange rates were adopted in the country, offering a rare opportunity to address the issue. The effects of China's interest rate differential (IRD) and unemployment rate on the exchange rate are also discussed in this paper. The time series data – including the exchange rate, IRD and unemployment rate – are used in the unit root test and Johansen test to verify the long-term equilibrium between real exchange rate and unemployment rate in specific periods of time. Since the findings indicate no correlation between the exchange rate and IRD, it is possible to predict the value of Chinese yuan based on China's unemployment rate, but not IRD. China's government slows down the appreciation of its currency when the lagged unemployment rate is high.