Not Perfect Arbitrage Under The Conditions Of Equilibrium Exchange Rate

Since the Asian financial crisis in 1997,the RMB exchange rate has been the topic of discusses in the community of the theory and industries from home and abroad.They concerned about not only whether RMB should be revaluated but also the mechanism reform of RMB exchange rate formulation.As far as the revaluation and devaluation of RMB are concerned,the critical task is to calculate the equilibrium exchange rate of RMB,and to the mechanism reform of RMB exchange rate formulation,it is important to calculate the rational floating band of RMB exchange rate.And this paper is just to solve the very two problems.Specifically speaking,the paper tries to analyze the RMB equilibrium exchange rate under the condition of imperfect arbitrage and draws the conclusion that there is an equilibrium band of RMB exchange rate which can serve as the rational floating band of RMB exchange rate.The paper firstly analyzed the decision of equilibrium exchange rates under the perfect arbitrage.In a model including one country,two sectors and two kinds of products,the author believed that equilibrium exchange rates under perfect arbitrage are decided by the differences in the preference to the tradable and non-tradable products,the rational debt-to-GDP ratio and the productivity.In more detail,the equilibrium exchange rate is equal to the relative marginal productivity of the two country's capital plus some factors in demand and supply,and the changing of the equilibrium exchange rate is caused mainly by the advancing of productivity.Then,the paper got rid of some assumptions to analyze the equilibrium exchange rate under the condition of imperfect arbitrage,which means a considerable transaction cost and sunk cost.And the paper used dynamic programming to prove out that under the condition of imperfect arbitrage,the equilibrium exchange rate is a band of exchange rates including purchasing power parity,and when the transaction cost and sunk cost is zero,then the equilibrium band of exchange rate would be a point,that's PPP.So we can use PPP,which serves as the central equilibrium exchange rate,the maximum and minimum of the equilibrium band of exchange rates to describe the equilibrium exchange rate under the condition of imperfect arbitrage.Based on the above results,the paper established a multiple linear regression model to search for the RMB central equilibrium exchange rate under the condition of imperfect arbitrage,and then a logistic smooth transition auto-regression model was used to seek the maximum and minimum of the equilibrium band of RMB exchange rate.The results are as follows:if the deviation from the central equilibrium exchange rate is used to calculate the equilibrium band of RMB exchange rate,the band is [-18.2%,14.9%],what's more,the RMB exchange rate will transfer from the internal band to the external band(or from the external band to the internal band) at a high speed.In the end,the paper gave its own opinion:Since the RMB exchange rate system reform in 1994,the RMB exchange rate in foreign exchange market has been stable, and at the same time the RMB equilibrium exchange rate has been appreciated,so RMB exchange rate has been under-valuated day after day;and as far as the mechanism reform of RMB exchange rate formulation is concerned,the equilibrium band of RMB exchange rate is[-18.2%,14.9%];and to decrease the nowadays surplus liquidity,China should revaluate RMB exchange rate repeatedly and discretely.