An Empirical Research On RMB Equilibrium Exchange Rate And Misalignment Of RMB Exchange Rate

This dissertation is a study on the equilibrium real exchange rate of RMB. And its objective is to build the empirical model of equilibrium real exchange rate of RMB, estimate the exchange rate misalignment and analyze the reason of the misalignment in China, which covers the period from 1985 to 2005, and put forward some proposals to the reformation of RMB exchange rates formation mechanism.The dissertation consists of 4 chapters, and the contents of each are as follows:Chapter one defines several concepts about exchange rate, systematically describes five kinds of western classic theories about the determination of equilibrium exchange rate, including Relative Purchasing Power Parity, Fundamental Equilibrium Exchange Rate (FEER in shorts), Behavioral Equilibrium Exchange Rate (BEER in shorts), Natural Real Exchange rate (NATREX in shorts), Equilibrium Real Exchange Rate (ERER in shorts). Chapter two dwells on the evolvement process of the exchange rate of RMB and generally divides it into four different periods as follows:①the exchange rate of RMB before reform and open policy,②the exchange rate of RMB before the 1994 reform of exchange rate,③the exchange rate of RMB during year 1994 and 2005,④the exchange rate of RMB after 2005.Chapter three based on ERER theory and using developing countries' empirical experience of equilibrium exchange rate for reference, in first place chooses major fundamentals that may be related to equilibrium exchange rate of RMB, and then constructs the econometric model of equilibrium exchange rate of RMB by using Engle-Granger two-step co-integration analysis on annual data from 1985 to 2005. On the basis of the model built, the dissertation employs Hodrick-Prescott filter method to estimate the long-run equilibrium real exchange rate of RMB and the exchange rate misalignment in China.Chapter four analyzes the reason of the misalignment of RMB exchange rate, which covers the period from 1985 to 2005, and put forward some proposals to the reformation of RMB exchange rates forming mechanism.The main findings and viewpoints of the dissertation are as follows:①There are four fundamental factors in the determination of the equilibrium real exchange rate of RMB. They are the terms of trade, the ratio on foreign exchange reserve to gross domestic products, the ratio on consumption of government to gross domestic products, the ratio on annual increase of monetary supply to gross domestic products. Specifically, the first three factors have a positive relationship with the equilibrium real exchange rate of RMB while the last one has a negative relationship with the equilibrium real exchange rate of RMB;②The real effective exchange rate of RMB has always fluctuated around its equilibrium real exchange rate, and experienced overvaluation and undervaluation. Real exchange rate of RMB has, from 1985 to 2005, been misaligned during most of the sample period, particularly, undervaluation occurred in 1986-1988 period, 1991-1994 period and 2003-2005 period, overvaluation occurred in 1985, and 1996-2002 period;③During the process of the reformation of RMB exchange rates formation mechanism, we should realizing convertibility of capital and financial account step by step, improving the macro economic control mechanism and put forward proper macro economic policies, prevent the overshooting in RMB appreciation.This dissertation consists of three innovative points as follows:①The dissertation, based on ERER theory and using developing countries' empirical experience of equilibrium exchange rate for reference, in first place chooses major fundamentals that may be related to equilibrium exchange rate of RMB, and then constructs the econometric model of equilibrium exchange rate of RMB by using Engle-Granger two-step co-integration analysis based on annual data from 1985 to 2005;②On the basis of the model built above, the dissertation employs Hodrick-Prescott filter method to estimate the equilibrium real exchange rate of RMB and the exchange rate misalignment in China, and further analyzes the reason of the misalignment in China, which covers the period from 1985 to 2005.③the dissertation has put forward some proposals to the reformation of RMB exchange rates formation mechanism, which jointed to the Chinese current economic situation and developing stage and economic theories.