Research On Economic Factors Affecting The RMB Exchange Rate

The People's Bank of China had announced to execute a managed floating exchange rate system of RMB on July 21,2005, which was adjusted to the supply and demand of the market and a basket of currencies. Then the reform of the formation of RMB exchange rate carried on in process, achieved the desired results and played a positive role. However, that the appreciation of the RMB against the U.S. dollar was accelerating in 2010 has triggered the discussion among the domestic scholars on the equilibrium level and new reform of the exchange rate system of RMB.The PBC indicated to promote a new round reform of RMB exchange rate formation mechanism and strengthen the RMB exchange rate flexibility on June 19,2010, which is based on situation of the domestic and international economic and China's international balance of payments. Therefore, in order to manage of the RMB exchange rate in a dynamic way and reflect the supply and demand of the market, it s necessary to make sure the equilibrium level of the RMB exchange rate and economic factors that affect it, as well as the level to be affected.This paper begins with the linkage between exchange rate and economic factors and has carried on some theoretical analysis and empirical study on economic factors impacted on the real effective exchange rate. The route of this paper is that screens the classical research documents about the exchange rate and economic factors to select some representative factors and re-classify into real economy aspects or monetary aspects, and then to be applied to the co-integration, VAR impulse response and variance decomposition. On this basis, it estimates the equilibrium level of the RMB real effective exchange rate and its misalignment, which constitutes the theory on the economic aspects to execute the RMB exchange rate reform.Analysis results show that:Although economic factors influence the REER flexibility insignificantly, the extent of the impact has reinforced in the long run. In addition, because of the special conditions and exchange rate policy in our country, the conclusion of the empirical analysis in this paper is slightly different from traditional theory, which is to be improved and corrected at the policy aspect in further. From the result of calculating the equilibrium exchange rate, we conclude that it exists a slight deviation between the REER and its equilibrium level in both real economy aspects and monetary aspects, but RMB exchange rate is still operating within a reasonable range, so the rapid appreciation of the RMB in the short term is not necessary. In view of these conclusions, the new round of the RMB exchange rate reform should fully respect the role of economic factors, and take measures to adjust the economic factors so as to make the REER move closer to its equilibrium level, which will be an important guarantee to realize our economy in equilibrium, not only internal but external.