Abstract: At present, with the strong revival of trade protectionism and the looming window of interest rate hikes by the Federal Reserve, the difficulty of regulating China's monetary policy has increased significantly. In particular, the direction of interest rate adjustment needs to be clarified in the face of the current synergistic downward pressure on the economy and the exchange rate. In view of this, an empirical equation describing the linkage mechanism between interest rates and exchange rates is constructed and subsequently estimated using a time-varying coefficient state space model, which provides an empirical explanation for the linkage mechanism between interest rates and exchange rates. The study shows that, firstly, the linkage mechanism between interest rates and exchange rates is not constant, in which, when there is a trend change in the value of the RMB, the central bank will adopt a pro-rate operation to reduce the time cost of the change in the value of the currency, while under normal circumstances, it will usually adopt a reverse operation to stabilize the value of the currency; secondly, the policy will of the central bank to stabilize the value of the currency is still obvious at this stage, which indicates that the RMB still does not have a Finally, the recent phase down of interest rates is mainly pulled by the continued low output and inflation, which means that maintaining stable domestic economic growth and holding the bottom line of no systemic deflationary risk is still the primary task of monetary policy regulation.

Keywords: nominal interest rate adjustment; exchange rate volatility; rolling correlation coefficient; state space model