The Balassa-Samuelson Effect Of RMB

As a core relative variable in an open economy real exchange rate is essential to realize internal and external balance of an economy.With the accelerating development of the economic globalization and the continuously growing degree of China's openness to the outside world being an important outward economic variable real exchange rate of RMB are becoming more and more important for China's economic growth,RMB exchange rate policy faces increasing challenges.A large number of theoretical and empirical studies show that the real exchange rate of a currency should be set at a reasonable level, and large degree of misalignments between the real exchange rate and the purchasing power parity will always do harm to economic growth.We find out that three factors lead the nominal exchange rates to deviate from PPP:movements in the relative price of tradable goods; movements in the relative weights of domestic and foreign non-traded goods; changes in the internal price ratio.This paper adds the Balassa-Samuelson effect into the sticky price monetary model to explain the influence of output,monetary supply,interest rate and the price difference between tradable and non-tradable goods on the exchange rate between Chinese Yuan and US dollar.The analysis shows that the sticky price monetary model can explain the factors influencing the exchange rate of Chinese Yuan.The price difference between tradable and non-tradable goods affected the deviation of nominal rate from PPP, but the Balassa-Samuelson Effect didn't hold.