An Empirical Analysis On Real Exchange Rate And Equilibrium Exchange Rate Of RMB

Having compared and appraised some advanced equilibrium exchange rate theories, this paper chooses Edwards's and Elbadawi's developing country models as theoretic guidance. Considering China's economic realities, the author chooses major fundamentals that may be related to equilibrium exchange rate of RMB. Empirical analysis is performed on annual data covering 1985 to 2004, and the model of equilibrium exchange rate of RMB is constructed. On the basis of the constructed model, the equilibrium exchange rate is derived and the misalignment is also calculated. Then some basic conclusions can be made: (1) the real effective exchange rate of RMB has always fluctuated around equilibrium exchange rate, and experienced overvaluation 3 times and undervaluation 3 times obviously; (2) With the regression model constructed in the paper, we can calculated the misalignment of real exchange rate that is about 5.68% in 2005, and the real exchange rate of RMB forecasted will be a likely appreciation in 2006; (3) Once the economic variables transcend their corresponding threshold, their impact on exchange rate will decline a lot, what's more, maybe the impact will diminish. Policy makers are expected to pay special attention to it.The article consists of four sections: In the first section, I introduced major research background, research methods, and some important exchange rate concepts; in second section, I discussed main exchange rate theories and empirical research models in world-wide international literatures. and on the basis of Edwards's and Elbadawi's models, I anglicized the model of equilibrium exchange rate in developing countries; in the third part I choose some perfect economic fundamentals and constructed the model of equilibrium exchange rate of RMB; the forth part is the empirical research conclusion, in this part, I anglicized real exchange rate situation in China during the past 20 years, forecast the trend of real exchange rate in 2006, and I gave some recommendations on finance policy in the end.