The Empirical Study On RMB Equilibrium Exchange Rate: 1994-2006

Exchange rate is the core problem in the field of international finance, and equilibrium exchange rate is the core of the core problem. The rational exchange rate level that adapt itself to equilibrium exchange rate and effective exchange rate system will do help to the health and continual improvement of an economy. However, unfit exchange rate level and improper exchange rate system will threaten the stability of economy and finance, and can even arouse regional financial crisis. Nowadays, under the pressure of RMB's appreciation expectation and the background of the problem of RMB's exchange rate have become the focus of economics and politics in global ,the study on the equilibrium exchange rate of RMB will make for the clear understanding of this expectation, and provide some probable solutions for the relaxation of the expectation.Having compared and appraised some advanced equilibrium exchange rate theory and defined the concept of exchange rate, the paper chooses Edwards, Elbadawi and Montiel developing country exchange rate model as theoretic guidance. Based on behavioral equilibrium exchange rate as methodology and using developing countries' empirical experience of equilibrium exchange rate for reference and combining with the condition of China, the paper chooses major fundamentals that may be related to equilibrium exchange rate of RMB. ADF unit root test, Johansen co-integration analysis, error correction model and H-P filter are performed on seasonal data from 1994 to 2006, and the model of equilibrium exchange rate of RMB is constructed. In this model, there are four variables, they are labor productivity, terms of trade, openness and net foreign assets. Using the Eviews5.1, this paper estimates RMB's equilibrium exchange rate, and calculates and analyzes the misalignment of RMB's exchange rate from 1994 to 2006. Then some basic conclusion could be made: the real effective exchange rate of RMB has always fluctuated around equilibrium exchange rate, and experienced different overvaluation and undervaluation; in the long run, the real effective exchange rate and equilibrium of RMB are faced with appreciation; the ability of RMB's exchange rate revised itself is poor.; after the reform of RMB exchange rate regime in 2005, the misalignment is not as serious as before, the real effective exchange rate is more and more close to equilibrium exchange rate; at present RMB exchange rate experiences overvaluation to a certain extent. To solve the problem of exchange rate system, so it is very necessary and urgent to make the exchange rate of RMB more flexible and elastic, to perfect the theory of exchange rate adjusted, to carry out the deal of exchange rate with wish, to strengthen and amplify the sound domestic financial market.