Rmb Real Exchange Rate Misalignment Measure Of Economic Growth Effect

As a core relative variable in an open economy,real exchange rate is essential torealize internal and external balance of an economy.A large number of theoretical andempirical studies show that the real exchange rate of a currency should be set at areasonable level,and large degree of misalignments will always do harm tomacroeconomic balance and economic growth.With the accelerating development ofthe trend of economic globalization and the continuously growing degree of China'sopenness to the outside world,being an important outward economic variable,realexchange rate of RMB are becoming more and more important for China's economicgrowth,RMB exchange rate policy faces increasing challenges and deserves evenmore attention.Consequently,to measure the extent of misalignments of RMBobjectively and study the effect of the misalignments on growth and economicstructural change are related to an accurate and reasonable evaluation of China'sexchange rate polices carried out in the past decades,and can provide adecision-making basis for the future reform of China's exchange rate regime.Focus on the topics of real exchange rate misalignment and its growth effect,thisdissertation measures the degree of RMB real exchange rate misalignmentsemploying suitable econometrical techniques and studies the growth effect of RMBreal exchange rate misalignments from quantitative and structural perspectiverespectively,which will provide new evidence to understand the direction andmechanism of the impact of RMB real exchange rate misalignments on China'seconomic growth.The dissertation is divided into 6 chapters as follows:Chapter 1 is introduction,which first gives the background and implication ofthe study.Then the introduction reviews the literature about measurement of RMB realexchange rate misalignments and economic growth effect of real exchange ratemisalignments,and based on which,the core task of the work is derived.Then theintroduction describes the ideas,structure arrangements and methods of the researchwork,alone with the innovation and shortage of the study,and finally defines somebasic concepts。Chapter 2 studies the basic concepts and theories of real exchange rate andequilibrium real exchange rate.Firstly,this chapter describes the categories,measurement methods of real exchange rates and the interrelation between them.Then points out that internal real exchange rate is a signal based on which the resources areallocated between tradable sectors and non-tradable sectors in the economy;externalreal exchange rate is an indicator which measures the foreign competitiveness of aneconomy.The interrelation between internal and external real exchange rate founds thebase to understand the function of real exchange rate in an economy.Then this chapterreviews the basic ideology and principal contents of some important equilibriumexchange rate theories,and then makes a comparison between these equilibriumexchange rate theories from the perspectives of the definition,nature and realizationof equilibrium exchange rate,and then discusses the adaptability of the theories toRMB.This chapter holds that the core value of equilibrium exchange rate should bealone with internal balance,which means economic growth,price stability andacceptable unemployment ratio;and external balance,which means sustainableexternal accounts.Chapter 3 estimates the degree of misalignments of RMB real exchangerates.Based on former relative studies,this chapter adopts data from 1994Q1 to2008Q2 and makes an equilibrium real exchange rate equation,in which RMB realexchange rate is the dependent variable and China-Foreign relative productivity,terms of trade,degree of openness,government expenditure ratio and net foreignassets serve as explanatory variables.Then based on Johansen co-integration andARDL co-integration techniques,this chapter estimates the equilibrium real exchangerate and the degree of misalignments of RMB.In order to make a robust analysis,HPfilter technique is employed to estimate the equilibrium real exchange rate and themisalignments degree of RMB.The results show that RMB has experiencedundervaluation and overvaluation three times respectively,but the degree ofmisalignments are no more than 10%,which means that RMB real exchange ratemisalignments are not serious.Chapter 4 studies the growth effect of RMB real exchange rate misalignments onChina's economy growth(total economy,tradable sector and non-tradable sector)from the quantitative perspective.Genenally speaking,the tradability of sectors willaffect the direction and size of impact of real exchange rate,so based on the study ofthe tradability of different sectors in China,this chapter estimates the growth effectsof RMB real exchange rate misalignments on the whole economy,tradable sector andnon-tradable sector respectively.The results show that RMB undervaluation is notonly helpful to the growth of China's total economy,but also to the tradable sector especially narrow tradable sector;RMB undervaluation has a positive but notstatistically significant effect on non-tradable sector,which effect has 4 quarters lag.On the contrary,RMB overvaluation is harmful to economic growth.Chapter 5 studies the structural effect of RMB real exchange rate misalignmentson China' economic growth.Economic structure is an important perspective ofeconomy growth.The dynamics of economic structure includes the change ofabsolute ratio of tradable sector and non-tradable sector to the total economy;and thechange of the relative ratio of tradable sector to non-tradable sector.The results showthat RMB misalignments have important effect on the dynamics of China's economicstructure.Specifically,RMB undervaluation enhances the position of tradable sectorand weakens the non-tradable sector,and as a natural result,RMB undervaluationraises the relative ratio of tradable sector to non-tradable sector.Instead,RMBovervaluation has an opposite effect.These results are important to understand thestructural dynamics of economic growth of China.Chapter 6 summarizes the full dissertation first,then points out policyimplications of the main findings of the study.