Research On RMB’s Equilibrium Exchange Rate And The Characteristics Of RMB’s Exchange Rates And Its Pass-through Effect

Since the Third Plenary Session of the Eleventh Central Committee, with the implementation ofthe reform and opening policy, China’s foreign trade has become increasingly active. Between1981-1989, China’s foreign trade deficit is an annual average of4.172billion U.S. dollars, China’strade surplus of295.47billion U.S. dollars in2008. in a time of less than20years, China has not onlyreversed the trade deficit situation, and made the trade surplus reached a peak of nearly$300billion.A huge trade surplus makes the RMB exchange rate issue is more and more the concern of theinternational community. Western society, especially American generally considered: the reason thatChina’s foreign trade continues to maintain a substantial surplus, is that the yuan artificiallyunderestimated. Underestimated yuan makes Chinese unfair trade advantage is maintained. Especiallyin recent years, the international community pressure to revalue its currency, is constantly large. It canbe said that this kind of pressure is to promote one of the main driving force of the reform of the RMBexchange rate regime in July21,2005. According to statistics, in accordance with8.11of the centralparity of RMB against the U.S. dollar by the date of2005exchange rate reform, the RMB against theU.S. dollar has appreciated by more than20percent by the end of2011. However, calling for the yuancontinues to appreciate, is weakened. Therefore, since there is a huge down Since China’s foreigntrade, the RMB exchange rate issue has been one of the hottest research topics. Studying RMBexchange rate equilibrium, characteristics, and its impact on other economic variables, not only is ofgreat theoretical value, but also of great practical significance.This paper deeply studys the equilibrium exchange rate of RMB and its related issues byconstructing a new model, creating multiple composite cointegration (MICCT) measurement methods,and using ARFIMA-FIGARCH and Fractional VAR-GARCH-BEKK and other cutting-edgemeasurement methods. The study found:First, the multiple composite cointegration (MICCT) is most reasonable to study the long-termequilibrium of the RMB exchange rate problem, and it can not only capture a long-term impact of theRMB exchange rate that has one of unknown impact factors, but improves pm time series’ stabilitytest lever, the MICCT is most reasonable.From an empirical conclusion, in the sample period, the RMB exchange rate does occurstructural mutations. Structural break point occurs at the point in time of dramatic changes of the RMB exchange rate, and external economic factors have long-term effects, that is, when the BEERmodel is used, the Chinese elements in the model should be joined, in particular, the exchange ratecan not be ignored.The results also show that: In the sample period, the RMB exchange rate does not exist thephenomenon of significantly underestimating. RMB deviation from the long-term equilibrium level ofthe real exchange rate is only0.012%, far less than about40%that is the RMB undervalued exchangerate level by the foreign; Moreover, since the fourth quarter of2009, the RMB exchange rate issuitable to the level of the long-run equilibrium exchange rate and overvalued gradually.Second, the autocorrelation function of Figure and R/S test of time series of the RMB realeffective exchange rate and the RMB against the U.S. dollar bilateral exchange rate, show that meanprocess (first moment process) of RMB real effective exchange rate and the RMB against the U.S.dollar bilateral exchange rate have significant long memorycharacteristics. Therefore, the differentialautoregressive moving average model (ARIMA model) is difficult to accurately engraved withdescription of mean dynamic process of the RMB real effective exchange rate and the RMB realeffective exchange rate of RMB to U.S. dollar bilateral exchange rates, and the ARFIMA model ismore reasonable. ARFIMA model’ residuals of the RMB real effective exchange rate and the RMBagainst the U.S. dollar bilateral exchange rates, exist heteroskedasticity phenomenon, therefore, theuse of ARFIMA model are obvious shortcomings to characterize and describe the RMB real effectiveexchange rate and the RMB against the U.S. dollar bilateral exchange rate. Both ARFIMA model andR/S test, are not negated that the bilateral exchange rate of the RMB against the U.S. has memoryeffect.The long memory characteristics of the process of RMB real effective exchange rates andbilateral exchange rate of the RMB against the U.S. dollar, shows that the real effective exchange rateof RMB and its bilateral exchange rate against the U.S. dollar, have a certain stickiness and their trendhas continued. And some unexpected external events will have a long-term impact to the real effectiveexchange rate and its bilateral exchange rate against the U.S. dollar.Establishing ARFIMA-FIGARCH and of ARFIMA-FIAPARCH-M model, that RMB againstU.S. dollar bilateral exchange not only exists Long Memory, but its volatility exists a significant longmemory, that is, RMB against U.S. dollar bilateral exchange rate has double long memorycharacteristics; This shows that the current level and the current level of volatility of the RMB againstthe U.S. dollar bilateral exchange rate, are dependent on their own historical information for a longer period of time; Similarly, its current level and the current level of volatility will also have an impact inthe longer time period.Third, The RMB exchange rate against the dollar has certain effects on the domestic price level,every one percentage point rise in the RMB exchange rate to U.S dollar, domestic price index rose0.117percentage points. And the pass-through effect of the RMB exchange rate against the yen islower than against the dollar. Because in a very long period of time, the RMB’s policy is pegged to thedollar’s exchange rate in our country, and the United States of America is one of China’s main tradingpartner countries, the changes of RMB exchange rate to U.S. dollar will have great affect on theChina’s domestic macroeconomic variables, and the RMB bilateral exchange rate obviously is not asthe U.S. dollar so sensitive because of the above reasons.From the empirical findings of the study, the RMB exchange rate coefficient is significantly lessthan1, and it is shows that the RMB exchange rate does not have complete transfer effect. At thesame time, from the point of view of statistical rate coefficient in the three mean equation, whether theRMB nominal exchange rate, the RMB exchange rate against the U.S. dollar and the RMB exchangerate against the yen does not have obvious price spillover effect on the domestic consumer price index,therefore it is difficult to inhibit domestic consumer price index by the methods of improving theRMB exchange rate.The RMB nominal exchange rate, the RMB exchange rate against U.S. and yuan showed thecertain volatility spillover effect; but from the value of them, they are bigger than mean spillovereffects. It indicates that the RMB exchange rate and the domestic price level have small mutualinfluence, but have a certain degree of interaction between the two order moment.Overall, the RMB exchange rate have a certain impact on the domestic price level, there arevolatility spillovers between them. of course, there are some other factors affect the conduction of theexchange rate on the domestic price level, such as the floating interval control of the exchange rate ofthe RMB against the U.S. dollar and China’s foreign exchange management system.Fourth, there exist a long-term stable cointegration relationship between the balance of trade, thebilateral real exchange rate of the RMB against the U.S. dollar, China’s gross domestic product (GDP),U.S. foreign total imports, and economic structure variables.There can be seen from the cointegration equation, the real exchange rate of the RMB against theU.S. and China trade balance showed changes in the same direction, indicating that when theincreaseing of the real exchange rate of the RMB against the U.S. dollar, China’s trade balance will be improved; in the short time, there is not the "J-curve" effect between the RMB real exchange rateagainst the U.S. dollar and China’s trade balance and the long-term cointegration relationship. fromthe results of Granger causality test, there does not exist Granger causality between them, which thatreal exchange rate of RMB against the U.S. dollar, is not the reason for the change of China’s tradebalance, and the goal of balancing trade will be difficult to achieve by the RMB.China’s economic structure and trade balance between the long-run equilibrium relationship havethe long-term cointegration relationship and they change in the same direction. From impulseresponse function, the economic structure is the Sino-US trade surplus important reason. Due to thedifferent elements of resource endowments and industrial level, the economy of the United States andChina in a very long time have strong complementarity. Due to the strong complementarity of theeconomies, that there are control of China’s export commodities in the United States, must producethe phenomenon of Sino-US trade surplus. If the United States does not change policy, in any caseforcing the appreciation of the RMB against the U.S., it is foreseeable that this trade surplus will beheld.From impulse response function, a unit of the RMB exchange rate against the dollar is given, inthe pulse response’s period, China’s economic structure has positive effect. And it shows that theRMB exchange rate against the dollar is smaller with the appreciation of the RMB against U.S. dollar,output value of the first industry is smaller, output value of non-agricultural industry is more, it showsthat the appreciation of the RMB against U.S. dollar is conducive to promoting the development ofChina’s non-agricultural industries and to China’s industrial structure be adjusted to the senior.