The Theory And Methodology Of The RMB's Effective Exchange Rate Index System

Under the Bretton Woods System,due to the "double hooked" mechanism that the value of the US dollar hooked with the Gold while the value of the other currencies hooked with US dollar,the exchange rate between currencies was relatively stable.During this period,the economic authorities and the market participants only focused on the bilateral exchange rate.However,With the breakdown of the Bretton Woods System,exchange rates between currencies became more fluctuated than ever before,A currency always appreciated towards some currencies while depreciated towards other currencies.Only focusing on the bilateral exchange rate can hardly meet the need of observing the overall fluctuation of one currency's exchange rate.Therefore,Effective Exchange Rate Index(EERI)emerged as the times require.Effective Exchange Rate Index is a kind of weighted exchange rate index,which is weighted average of a series of bilateral exchange rate under a specific weighting scheme.Because it has a broad reference system which is consisted of a various of currencies,it can measure the fluctuations of the currency's value and reflect the changes of the economic performance in a more overall view.Based on the different research angles,the EERI can be divided into the following two types,the EERI on the trade perspective and the EERI on the financial perspective.The former one which starts from foreign trade perspective can be further classified into another two types,the Nominal Effective Exchange Rate Index(NEERI)and the Real Effective Exchange Rate Index(REERI),depending on whether adjusted by the price indicators.The NEERI on the trade perspective can measure the overall fluctuation of the value of one economy's currency towards the currencies of economies that has a close trade relationship.The REERI on the trade perspective can reflect the overall changes of the price competitiveness of one economy's commodity towards the commodity basket consisted of other economies that has a close trade relationship with it.The latter one starts from the financial perspective can be also classified into two types,the NEERI on the financial perspective and the REERI on the financial perspective.The NEERI on the financial perspective can measure the overall fluctuation of the value of one economy's currency towards currencies of economies that has a close capital relationship.The REERI on the financial perspective which has different theoretical basis can reflect the changes in the financial performance of one economy.The differences between the EERI in the trade and financial perspective can be summarized as follows:(1)In the aspect of theoretical base.The formal one bases on the theory of "the law of one price" while the latter one varies as the function of the relevant EERI.(2)In the aspect of the selection of reference system and weighting scheme.The formal one focus on the trade flows while the latter one focus on the stock and flow of the capital.At present,the market-oriented reform of RMB's exchange rate has entered the phase of deep water-zone,constructing the RMB's Effective Exchange Rate Index System(EERIS)has important theoretical significance and practical value.In the aspect of theoretical significance,this dissertation constructs the EERI based on the different trade partners and the Forward Financial Effective Exchange Rate Index(FFEERI)respectively,Additionally,illustrates fully on their theoretical basis and constructing method,makes marginal creative contribution to the research area of EERI.In the aspect of practical value,according to the China's development,the dissertation constructs the RMB's EERI based on the different trade partners perspective,Capital weighted EERI of RMB and RMB's FFEERI,Additionally,analyzes and argues the practical value.It is beneficial for measuring the exchange rate of RMB effectively and observing the macroeconomic performance of China scientifically.The basic frame and contents of the dissertation can be introduced as follows:First of all,the dissertation introduces and analyzes EERI on the trade perspective by classifying them into the traditional and creative types.Traditional Effective Exchange Rate Index(TEERI)always is constructed and distributed by world economic institutions and central banks.The Creative Effective Exchange Rate Index(CEERI)is the index which is constructed in different subdivisional perspectives.In the aspect of the traditional EERI,the dissertation emphasizes the concept of the third market effect and throws a highlight onto the mechanism of how the TME influences the weighting scheme.Additionally,the dissertation illustrates the calculation process of multilateral competitive weight by flow chart and calculating table.In the aspect of creative EERI on the perspective of trade,the dissertation focuses on current two types of representative indexes.(1)The EERI on the industrial perspective.It can make up the deficiencies of TEERI caused by the "sum misalignment" and measure the change of price competitiveness of every specific industry.(2)The EERI on the enterprise perspective.According to the specific situation of the enterprise's foreign trade,it can reflect the exchange rate fluctuation and exchange rate risk faced by different enterprises effectively.On this basis,the dissertation introduces the theoretical basis and construction method of EERI based on the perspective of different partners,additionally,analysis the necessity and applicability of the index.This is one creation point in the dissertation.On the process of introducing and analyzing the creative EERI on the perspective of finance,the dissertation focuses on current four types of creative indexes.(1)The capital weighted EERI.It rearranges selection criterion of reference system and the weighting scheme and can reflect the exchange rate movements among the countries or markets which has a close capital relationship with one country;(2)The EERI in the perspective of financial asset's attractiveness,which is based on the portfolio equilibrium model to construct the real FEERI for measuring the relative changes in the attractiveness of financial assets in one country;(3)The EERI in the financing costs perspective,which is based on the uncovered interest rate parity to construct the RFEERI for measuring the relative change in the cost of financing of one country;(4)The EERI in the international investment position perspective,which is based on the asset and liability position of one country to construct the FEERI for measuring the exchange rate risk faced by one country.On this basis,the dissertation constructs the FFEERI based on the covered interest rate parity which can measure the appreciation or depreciation pressure faced by one currency in the view of arbitrage.This is another creation point in the dissertation.Secondly,Taking the current characteristics of China's economy and the adaptability of the EERI into consideration,the dissertation explores the construction of EERIS of RMB.Thirdly,the dissertation explores the practical value of the traditional EERI,the EERI based on the perspective of different trade partners,the capital weighted EERI and the FFEERI by comparative analysis and empirical analysis.The relevant research results can be presented in the following four aspects.(1)The dissertation argues that both in the views of the fluctuation and volatility of the RMB's exchange rate were in a good situation and had a health development trend when compare the RMB's EERI of BIS to the bilateral exchange rates between RMB and other global currencies in the year of 2014 to 2015.Not only it was not the indication of "RMB Crisis" but also it is a sign of the progress in exchange rate marketization.It provided a new insight into illustrating the voice of "RMB Crisis"spread in the global financial market during the second half of the year 2015.(2)The dissertation refutes the comment that China had intended to keep the RMB undervalued to promote its foreign trade during the year of 2010 to 2013.the dissertation held the views that the RMB's exchange rate was not the key factor that led to the continuous surplus of its current account when comparing the EERI on the net import partners and the net export partners of RMB.When we observed the net import partners' EERI of RMB,we can find that it also has a obvious appreciation during this period.This can deny the logic of RMB's undervalue-the price competitiveness of China's commodity was improved-keep current account surplus in the opposite side.(3)The dissertation finds that it occurs not only the numerical differential but also the direction diversion when compare the CWEERI with the traditional EERI of RMB,it suggests that we can know the fluctuation of the exchange rate of RMB more comprehensively by the combination usage of the two different index.Additionally,through empirical study,we observed that there was a strong long term positive relationship between the FDI and the capital weighted effective exchange rate index(CWEERI)of RMB,the appreciation of the index by 1%can promote the FDI which will increase by 3.61%.In the short term,there was also a significant effect on FDI by CWEERI,the Error Correction mechanism will correct the short term change of FDI by the rate of 0.49.(4)According to the analysis of the Forward Financial Effective Exchange Rate Index(FFEERI)of RMB,before subprime crisis,the negative interest spread home and aboard is the key factor that caused the appreciation pressure of RMB.During the crisis,with the negative interest spread become narrow,the appreciation pressure of RMB was released.In the following 2011 to 2013,even though the spot exchange rate of RMB kept the appreciation trend,due to the positive interest spread,RMB faced the depreciation pressure viewed from the net effect.This was enhanced during the year of 2014 to 2015,However,due to the overall appreciation trend that RMB kept,in the last period of 2015,the depreciation pressure was ameliorated.What's more,the dissertation constructed the FFEERI of US dollar to prove the practical applicability due to the limitation of the forward exchange rate date of RMB.At last,three suggestions were made by the dissertation in order to improve and enrich the current EERIS of RMB.(1)Improving and implementing the construction and distribution work of RMB's EERI.As an international practice,the central banks always take the responsibility for undertaking the task of constructing and distributing the effective exchange rate index.China Foreign Exchange Trade Center as the direct affiliate of the People's Bank of China is suitable to be responsible for it.However,the aspects of the distribution frequency,the access convenience and the transparency of construction method should be improved further.(2)Taking the characteristics of China's economic development into account,Putting forward the distribution of the creative EERI,such as the EERI based on the enterprise perspective,the EERI based on the perspective of different trade partners and so on,will benefit for upgrading the current macroeconomic indicator system of China.(3)Improving the completeness and the timeliness of economic data.On the basis of distributing the spot economic data according to the SSDR,it is kind to make an effort to the traceability of the current economic data for supporting the relevant research on the area of EERI.