Empirical Study Of Equilibrium Exchange Rate Of Rmb Based On Beer Model

Equilibrium Real Exchange Rate is the real exchange rate which fulfilling the macro internal and external equilibrium. It is the main objective basis which could tell us whether the exchange rate is misaligned or not, and whether the policies of exchange rate need to be adjusted. Equilibrium Exchange rate is one of the core problems in exchange rate theories. In fact, the real exchange rate often departures with the equilibrium exchange rate, which leads to exchange rate misalignment. The long-term misalignment has a serious impact on the real economy. Therefore, it is crucial for governments and currency authorities to figure out the reasonable level of equilibrium real exchange rate. There had been a frequent subject of debates on the issue related to the exchange rate of RMB since 1998. Especially since the financial crisis happened in 2008, the debate on whether the exchange rate of RMB needs to be appreciated or not had become a hot point internationally. Considering the complicated international economic situation, we have to ask ourselves some questions as follows. Is the recent exchange rate of RMB reasonable? Which is the equilibrium exchange rate of RMB? To answer these questions, we have to calculate the equilibrium exchange rate of RMB firstly.At the beginning of this thesis, we summarized the previous theories and research methods on the equilibrium real exchange rate of RMB. Based on it, we confirmed the purpose of this thesis and research methods used in it. After analyzing the foreign and domestic research on this issue, we found out that the appropriate theory on this research is the BEER theory. First of all, it takes the endogen tic of equilibrium rate into account. Moreover, it believes that the equilibrium exchange rate is dominated by a series of fundamental economic factors in the long-term, and its results are well fit with the real economic situation. Secondly, we defined the concept of equilibrium real exchange rate. Based on it, we briefly introduced the popular western theories on equilibrium exchange rate recently and their relative advantages and disadvantages. They are the theory foundations for the empirical analysis in the following part.After that, it came to the crucial part of this thesis, the empirical analysis of equilibrium exchange rate of RMB based on the BEER theory. This model was modified according to the real economic condition of China. Then we established a model containing five variables, which were term of trade, opening-up effect, net foreign asset, productivity and government expenditure. This thesis estimated the equilibrium exchange rate of RMB based on cointegration, error correction model and H-P filter method. After that, it used H-P filter method to estimate the long-run equilibrium real exchange rate and the exchange rate misalignment in China, and analyzed the reason of misalignment. The real effective exchange rate of RMB had always fluctuated around its equilibrium real exchange rate. However, there was no obvious misalignment during these years.Finally, this thesis took a brief introduction about the recent situation about exchange rate issue of China, and analyzed the impacts of it on domestic economy. Moreover, it summarized the measures we should implement to facing the recent trend of the appreciation of RMB's exchange rate.