An Empirical Study On Equilibrium Exchange Rate Of RMB And China's Exchange Rate Misalignment

Currency crisis and its influence to economic growth in 1990s indicated the importance of exchange rate regime and exchange rate policy. Exchange rate would not only affect macroeconomic movement, but also affect resources allocation in microeconomic level. Since second half year in 2002, economy has grown rapidly, current account surpluses has enlarged continuously and foreign exchange reserves has increased rapidly in China, expectation of the appreciation of the RMB has been prevalent in the international financial markets, civil academe and policy authorities have been drastically discussing about whether or not RMB exchange rate need to be adjusted and whether or not the regime of RMB exchange rate need to be reformed. Therefore, it is very important and meaningful to study RMB exchange rate.This paper takes the misalignment of RMB real exchange rate since exchange rate regime's reform in 1994 as the mainline, and deeply discusses equilibrium exchange rate models and exchange rate mechanism of RMB. On the base of the comparison and assessment of several equilibrium exchange rate theories, this paper constructs the equilibrium exchange rate model of RMB using Johansen's maximum likelihood estimation, H-P filter and Gonzalo-Granger composition based on behavioral equilibrium exchange rate theory, and analyzes the misalignment of RMB empirically over the period from 1994q1 to 2004q1, and also puts forward policy implications about the reform of RMB exchange rate mechanism.According to studying the misalignment of RMB real exchange rate empirically, some main conclusions can be made: since RMB exchange rate reform in 1994, RMB real exchange rate has deviated from orbit of equilibrium exchange rate motion during most of the sample period, RMB real exchange rate has been misaligned, especially, drastic undervaluation has occurred since 2002q2, which also has an enlarging trend. One of the important policy factors of China's exchange rate misalignment is that China's fixed exchange rate regime of the de facto peg to the dollar since Asia financial crises in 1997,it is general trend to give up the fixed exchange rate regime of the de facto peg to the dollar. In view of drastic undervaluation of RMB real exchange rate, RMB exchange rate should appropriately appreciate to the extent from 5% to 10%, and empirical analysis indicates that appropriate appreciation of RMB exchange rate will not create drastic negative influence to macro economy.