Value Of Money

Foreign exchange rate is the price of one currency expressed in terms of another. If without the interference of the non-market factors, the exchange rate will follow the general principle of any commodity markets, say, it will be decided by the supply of and demand for the currency arising from the international economic activities. Price, which in general fluctuates around its value, is the reflection of the latter. In the long run, and under the close-to-perfect market condition, price basically converges to the value. That this article discusses the formation mechanism of the long-run exchange rate in the floating exchange rate regime is to discuss the formation mechanism of the value of a currency in the perspective of how the value of a currency is expressed by another currency.From 1994, RMB observes the strict pegged-to-U.S. dollar exchange rate regime. Although the margins of fluctuation were increased in recent years, generally speaking, the exchange rate of RMB cannot yet effectively reflect its supply and demand relation resulted from the international economic activities. In the recent decade, the relative inflation rates, relative interest rates, trade balances, the amount of the international capital flow and FDI between China and the U.S. have experienced substantial changes, but the exchange rate between the two currencies almost remains unchanged, which is likely to lead to the distortion of the RMB exchange rate.With the progress of China's reform and opening-up, China will involve more into the world economy. It is an inevitable trend that RMB will adopt the floating exchange rate regime. If RMB becomes floating, according to the economic indice of the recent years, it faces the pressure of appreciation. However, it is far from enough to point this out through the principles of macroeconomics. To decide whether a currency will appreciate against another currency, we'll first discuss the exchange rate formation mechanism. After we get known of the mechanism can we judge whether the exchange rate will change, and how.The most ideal way to discuss the appreciation of RMB is to find the formation mechanism of the long-run exchange rate between RMB and U.S. dollar. However,...