Research On The Influence Of The Product-Market Openness Of The Dynamic Adjustment To The Equilibrium Exchange Rate

This paper analyze how the product-market openness a?ects the dynamic adjustmentof equilibrium exchange rate based on three di?erent models.Firstly, we improve Hafedh's model by adding the factor of the product-marketopenness in it, and using the stickiness of Calor sticky-price as the measurement of theproduct-market openness. After discussion and analysis on the model, we get followingconclusion: The product-market openness will a?ect the magnitude and the enduringperiod of the ?uctuations of the real exchange rate, in response to exogenous shocks fromcurrency-market and financial policies. That means, a higher degree of product-marketopenness implies a small and short ?uctuation of the real exchange rate responsing toexogenous shocks. Otherwise, the result is opposite.Secondly, we found a di?erential equation model of a small open-economy systemwith the method of Zervoyianni's model. In this model, we apply the dynamic analysismethod to exploring how the product-market openness contributes to the dynamic ad-justment of equilibrium exchange rate under the microcosmic level. The result is that: Inthe process of exchange rate tending to balance, relative changes of price and net foreignasset positions cause in?uence on the dynamic adjustment of equilibrium exchange rateunder the shocks from product market, and the size and degree of this in?uence will bea?ected by product-market openness, which also directly a?ects the dynamic adjustmentof equilibrium exchange rate.Finally, taking RMB exchange rate for example, we choose the year data between1990 and 2006 to discuss how the product-market openness a?ects RMB equilibriumexchange rate in the aspect of empirical evidence, applying Edwards equilibrium exchangerate model, ADF test and cointegration test. We obtained that the product-marketopenness has significant in?uence on equilibrium exchange rate. The specific result is thatRMB exchange rate rises by 0.53 percent when the openness grows by 1 percent. Andthis also proves that the conclusions from the former two theoretic model are correct.Through our analysis from this paper, we can reach the conclusion: The product-market openness a?ects the size and the degree of ?uctuations of exchange rate in responseto unanticipated exogenous shocks when approaching to equilibrium. So it is an anxiliarymeasurement to adjust the policy on foreign exchange of our country, which means it cancontribute to exchange rate adjustment to enlarge or defate the openness the openness ofproduct-market, enriching the measurement for exchange rate adjustment.