An Empirical Study Of The Equilibrium Exchange Rate Of Rmb

Equilibrium real exchange rate is the real exchange rate fulfilling the macro internal-and-external equilibrium. It's the main objective basis which could judge whether the exchange rate is misaligned and the policies of exchange rate need to be adjusted. Equilibrium exchange rate is one of the core issues about exchange rate theories. In fact, the real exchange rate often departures the equilibrium exchange rate, which brings misalignment. The long-term misalignment will bring disadvantage impacts to the real economy. So it's important for the government and the currency authorities to confirm the reasonable level of equilibrium real exchange rate. Exchange rate policy needs to be adjusted. However, RMB exchange rate issue has been fiercely debated since the Financial Crisis in Asia. During the last few years, the situation seems to become worse. The debate on RMB exchange rate policy has put China into an awkward position of international relations. Facing the complicated international environment and changeful economic situation, we have to ask ourselves these questions: Is the current exchange rate reasonable? What's the equilibrium exchange rate of RMB? To answer these questions, we need to calculate the equilibrium exchange rate of RMB. 'First of all, we summarize research theories and methods on the equilibrium real exchange rate of RMB in China and put forward the aim and the methods used in this paper. The foreign investigations about the RMB equilibrium real exchange rate are few. By analyzing domestic investigations, we consider the equilibrium real exchange rate theory for developing countries and the behavior equilibrium exchange rate fit Chinese economy. They take into account the endogen tic of equilibrium exchange rate and consider a series of fundamental economic factors decide the equilibrium real exchange rate in the metaphase and long-term.Secondly, we define the concept of equilibrium real exchange rate and analyze its meanings combining with macro economy equilibrium. We introduce the different theories on equilibrium exchange rate and analyze their advantages and disadvantages separately. These are the theory foundations for our investigation in the following part. Theoretical theories related to equilibrium real exchange rate mainly include fundamental factor equilibrium, natural equilibrium and behavior equilibrium exchange rate theories. These theories are aimed to the developed countries. The theories of equilibrium exchange rate about developing countries are carried out by Edwards etc, which settle the base for the research of equilibrium exchange rate in developing countries.Thirdly, this paper is based on the BEER model presented by McDonald. According to the specific condition, the model is modified and a new model is established containing six variable colluding term of trade, opening-up effect, net foreign asset, government expenditure, productivity, money supply. The model as follow:REER=f (TOT~+,OPEN~-,NFA~+,GOV~+,PROD~+,M2~-)This paper estimates the equilibrium exchange rate of RMB based on cointegration, error correction model and HP filter method. The paper draws the conclusion that term of trade, opening -up, government expenditure and productivity are basic factors of REER. Among this term of trade, productivity and government expenditure make positive effect of REER, otherwise opening-up make negative effect. These are all coincidence with the theory analyses.On the basis of the model built, the paper uses Hodrick-Prescott filter method to estimate the long-run equilibrium real exchange rate of RMB and the exchange rate misalignment in China, and further analyzes the reason of the misalignment in China, which covers the period resent 15 years. The real effective exchange rate of RMB has always fluctuated around its equilibrium real exchange rate, and experienced overvaluation and undervaluation, but the fluctuation is no more than 20%. As the result of undervaluation of exchange rate of RMB, RMB should be appreciated. And some suggestions are given to perfect the exchange-rate forming mechanism. Therefore, the reform of RMB exchange rate regime is imperative, perfection of current RMB exchange rate mechanism, and realization of really managed floating exchange rate regime which is based on market supply and demand will be still beneficial to development of economy in China.