Empirical Study On RMB Equilibrium Real Exchange Rate: 1994-2009

Exchange rate is the core problem in the field of open economy, and equilibrium exchange rate is the core of the core problem. Renminbi (RMB) equilibrium exchange rate is a heatedly deputed and inevitable problem. Since 1990s domestic and foreign researchers have disagreed with each other not only about the determination and measurement but also misalignment and recorrection, affection and countermeasure of RMB equilibrium exchange rate. However, there are still no much consensuses in many aspects.With deepening of China's economic openness, RMB exchange rate have become the focus of economics and politics in global. Nowadays, under the pressure of RMB's appreciation expectation, RMB exchange rate Policy will be confronted with more and more challenges, 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.This article Profits from the western behavior equilibrium exchange rate theory, according to China's actual situation, develops a modified RMB equilibrium exchange rate model with financial factors. Use the method of factor analysis, choose two main component from ten variables which represent financial development scale,efficiency and structure, then use their own contribution as the weight to measure the whole level of financial development. Based on the suggestion from existing literature, actual situation and the data available, selects four basic economic factors including terms of trade, government spending, openness and net foreign assets. Uses modern econometric tools such as ADF unit root test, cointegration methods, ECM model and Hodrick-Prescott filter to computes RMB equilibrium exchange rate and the degree of misalignment based on quarter data from 1994 to 2009.The result of study indicates that terms of trade, financial development, government spending and openness effect RMB real exchange rate to a larger extent and Exist a table equilibrium relationships in long run. The degree of RMB exchange rate misalignment is not serious. From 1994Q1 to 1996Q1 RMB exchange rate was undervalued, but the degree of undervalued was decreasing. From 1996Q2 to 2002Q4 RMB exchange rate was relatively often overvalued. From 2003Q1 to 2007Q4 RMB exchange rate was continued undervalued. From 2008Q1 to 2009Q3 RMB exchange rate showed a light overvalued, but in 2009Q4 it arise a slight undervalued. Then, the paper analyzes the concrete reasons and the effects on economy of exchange rate misalignment. Finally, make some useful recommendations on improving RMB exchange rate policies.