A Research About Deviation Of China's Equilibrium Exchange Rate From Nominal Exchange Rate

Based on the theory of macro-economic and international finance , this thesis applied a new method to measure the equilibrium exchange rate of RMB. The result is that the nominal exchange rate of RMB has been undervalued for a long time. Furthermore, we studied negative effect of the deviation of RMB exchange rate in respect of resource draining, profit and loss over foreign currency reserve and integration of global market price. Thus we get the conclusion that for the sake of the stable development of economy in the long run the RMB nominal exchange rate should appreciate in great rangement.Accordingly, the thesis will be expounded in four chapters on the below:Chapter 1 The Background of ResearchIn recent years, RMB exchange rate has always been the worldwide focus. With the rapid increasing of China's trade surplus and foreign currency reserve, the pressure of appreciation of RMB exchange rate becomes heavier and heavier. Under the situation that the RMB exchange rate is supposed to appreciate, the emphasis of discussions among domestic and foreign scholars is that at what time and to what extent it will be. This chapter argues for whether the RMB exchange rate should appreciate, how the range should be and the method of calculation. And make clear of the main work and expected innovation. Chapter 2 Contemporary Exchange Rate ResearchThe specialists and scholars presented various ways to calculate equilibrium exchange rate on purpose of studying whether RMB has been undervalued or not.The popular research way on equilibrium exchange rate is based on general equilibrium theory. That is, establishing a unique equation by choosing macro-economic variables which represent both internal and external economy equilibrium and nominal exchange rate or real exchange rate to calculate the equilibrium exchange rate .However, there is a problem in such a model that it takes the fit value of the model as equilibrium exchange rate which in fact is the nominal exchange rate or real exchange rate. These models essentially do not conclude factors such as internal and external economy equilibrium, so the higher the degree of fitting is, the more approximate the result to be with the nominal exchange rate or real exchange rate.Chapter 3 Model of RMB Equilibrium Exchange RateBased on the analysis about RMB equilibrium exchange rate models in the past, this chapter put forward another model of RMB equilibrium exchange rate calculation. The model derives from the thought of the purchasing power parity (PPP) and considers equilibrium exchange rate should be coincident with PPP when economy is in both internal and external equilibrium. The train is to conclude both PPP and the general condition of economy and take two-step way to calculate. First, measure the initial value of equilibrium exchange rate, which solves the validity of the values of dependent variable. Second, establish a model to calculate the exact value of exchange rate equilibrium. By the innovations of methods, the author hopes that it can provide a new train to the study of equilibrium exchange rate. This new calculation model is different from ancient ones that it changes the way that establishes models by taking the real exchange rate as dependent variable .Chapter 4 Study on Negative Effect of Exchange RateNowadays regarding to exchange rate of RMB all recognize that it should appreciate. The mainstream of views has not realized the advantages of the appreciation of RMB exchange rate. It seems that appreciation is imposed by international pressure. While affirming the appreciation some articles always emphasize the negative effect of it and avoiding rapid appreciation. In order to analyze the influence of the undervaluation of RMB and answer what appreciation will bring to Chinese economy, this chapter measures how the undervaluation of RMB affects the loss of resource, the negative effect on the increment of Chinese economy in the long run and huge profit and loss of foreign currency reserve in the respect of the drain of resource, profit and loss over foreign currency reserve and integration of global market price.Through calculation of the deviation of RMB exchange rate and further analysis of negative effect of deviation, we come to the conclusion that the appreciation of nominal exchange rate can facilitate the transformation of increment pattern of economy. As a result, the decrement of deviation of nominal exchange rate from equilibrium exchange rate can lay a good foundation for the sustainable development of Chinese economy in the long run.