Rethinking The Current RMB Exchange Rate Formation Mechanism

As China's economic strength has grown,the RMB exchange rate mechanism becomes the focus of attention at home and abroad.The people's Bank of China announced the RMB exchange rate mechanism reform programme on July 21st,2005:the RMB exchange rate is no longer pegged U.S. dollars, but the introduction of more flexible based on market supply and demand,adjusting the reference to a baskete of currencies,managed floating rate mechanism.However,the voice of the major industrialized and reshape the RMB exchange rate mechanism.Their reason is that the fluctuation of RMB exchange rate is non-obvious and that RMB still pegged U.S. dollars.With the world economy, the deepening global integration, the international financial sector has undergone profound changes, in which the most outstanding performance of the unprecedented volatility of the exchange rate increased, and extremely frequent. Exchange rate fluctuations in the frequent and intense, not only allows people to engage in activities in the financial sector has faced increasing uncertainty, and even makes it engaged in daily production activities, also faces great risk. Therefore, the theoretical study of exchange rate determination has become the core of modern finance.Western traditional exchange rate theory, since its birth on the continued development and strengthening popular now, in these theories, some policy makers are still the main frame of reference. The Western tradition influence the exchange rate theory, the most widely used are:purchasing power parity theory, interest rate parity theory, the theory of international balance of payments and assets of the monetary theory. These theories have important theoretical and practical significance. Purchasing power parity theory from the perspective of the two docking commodity market analysis exchange rates, highlighting the equilibrium price index and exchange rate relationships; interest rate parity theory from the perspective of trade in capital to inspect the exchange rate, highlighting the relationship between capital market equilibrium; International the balance of payments theories from the perspective of the foreign exchange market equilibrium to explain the exchange rate issue; assets of monetary theory from a portfolio point of trying to exchange rate analysis.Based on the traditional theory of the exchange rate and the formation of China's exchange rate mechanism, this article from a theoretical and empirical point, through the traditional exchange rate theory analysis to compare the new mechanism of the RMB exchange rate formation rationality and shortcomings and put forward their views. This paper is divided into five chapters. From the first chapter to introduce the four aspects of the traditional exchange rate determination theory, namely the traditional exchange rate theory, in four parts:purchasing power parity theory, interest rate parity theory, the international balance of payments theory, monetary theory of assets. The second chapter describes the theory of exchange rate formation mechanism, including the "concept to define the factors that affect the exchange rate formation mechanism and the exchange rate formation mechanism of the International Comparison." ChapterⅢanalyzes the characteristics of the RMB exchange rate formation mechanism, as well as causes. ChapterⅣ,according to the traditional exchange rate determination theory to do several empirical analysis. Chapter V is about the exchange rate regime and exchange rate fluctuations. Concluded that:(1) through the traditional exchange rate theory, the study found that various types of exchange rate determination theories and models are limited, the lack of explanatory power of exchange rate fluctuations and forecasting capabilities. (2) purchasing power parity theory of exchange rate fluctuations for the empirical analysis, using data from different time periods examined found that purchasing power parity was established in our country's long-term period. (3) co-integration analysis for the RMB exchange rate deviate from the actual determination of the extent of the equilibrium exchange rate. (4) The exchange rate is import to the country. From the political and economic analysis of this new perspective on the exchange rate of questions. Concluded that:RMB appreciation pressure remains high, it should speed up the exchange rate formation mechanism reform, should also be quickly lower the proportion of dollar reserves.This paper's main findings are as follows: (1) A more systematic induction, combing the Western tradition of exchange rate determination theory, introduced a purchasing power parity theory, interest rate parity theory, the theory of international balance of payments and assets of the monetary theory. On this basis, using empirical research and theoretical analysis of the method of combining these different kinds of major Western Exchange Rate Theory in the applicability of the RMB exchange rate for in-depth research to explore and draw conclusions:the RMB exchange rate formation mechanism of rationality and inadequate(2)A more systematic summary of the contents of the exchange rate formation mechanism. These mainly include:the concept of the exchange rate formation mechanism of a summary of the impact of the exchange rate formation mechanism of the factors outlined, as well as the exchange rate formation mechanism of the international comparative analysis.(3) Using co-integration analysis method, a systematic analysis of the determinants of the RMB real exchange rate.(4) Sums up the current economic circles, exchange rate regimes in emerging economies, the consensus of the RMB exchange rate issue on the current international political and economic relations against the backdrop of research through the analysis of China and the United States respectively, interest groups and the government on the RMB / USD exchange rate effect and concluded:At present, RMB appreciation pressure remains high. China should speed up the reform of exchange rate formation mechanism so as to reduce pressure on the revaluation.These results for the exchange rate's long-term trend analysis provides a theoretical and empirical foundation, but also for China's exchange rate formation mechanism provides a reference so that we can learn from the West based on the theory of exchange rate determination for the special situation of our country specific analysis; to find out of the current RMB exchange rate formation mechanism and limitations of rationality has important practical significance.