The Development Of Purchasing Power Parity Theory And The Rmb Exchange Rate The Applicability Of Empirical Research

With the progress of internationalization and the development of Chinese market economy, setting reasonable exchange rates between RMB and other currencies has become a more and more important issue, which relies on a valid theoretical base. The starting point of the study about exchange rate is to find what are the basic deterministic factors of exchange rate in the long run. And purchasing power parity (PPP) is considered as a basic and explainable theory to play that role. PPP is the fundament of many existing articles about balance of payment and the determination of exchange rate, and as far as itself is a theory about the determination of exchange rate. This essay discusses the newest development of internationally theoretical and empirical studies of PPP. It has some empirical studies of PPP on Renminbi real exchange rate and its equilibrium exchange rate. And it does some research work between PPP of Renminbi and the Balassa-Samuelson thesis.The first part of the essay mainly deals with the Purchasing Power Parity Theory in a perfect capital market (PCM), then relax the perfect capital market assumptions gradually on regard of the transaction costs, taxes and uncertainty. At the same time some relative concepts such as real exchange rate are introduced and discussed in this part.In the second part, we have a review on the development of the empirical approaches of studies on PPP such as early research, unit root test, cointegration test, panel data test and so on, after that, give a littie talk about the real exchange rate nonlinearity adjust model, for it implies the future of research work in this field.And in the second part, we have a unit root test on Renminbi real exchange rate and find that we can not reject the null hypothesis that it follows walking-random. Then we make a cointegration test on the variables series that the real exchange rate is made up of and get the conclusion that there are some cointegration relationship among the Chinese consumer price index, the American consumer price index and the nominal exchange rate of Renminbi. What's more, the Renminbi equilibriumexchange rates are calculated by the way of the relative PPP, and the conclusion is that the Renminbi equilibrium exchange rates calculated on this way are not exact very much.In the last part, after the theoretical clarify and the mathematical express of the Balassa-Samuelson (B-S) thesis, some empirical research work has been made on the B-S thesis of the Renminbi real exchange rate, and some simplicity reason are pointed out to explain why the B-S thesis does not exist for the Renminbi real exchange rate.