Research On The Reason Of Rmb Exchange Rate Fluctuation Based On Relative Purchasing Power Parity

Chinses economy is developing rapidly since the new millennium, the GDP growth rate is remaining at 8% or more, the economic strength is enhancing day and day, and China is making an important effect in the international arena now.With the economy growing, one side foreign governments put pressure on China to require RMB appreciate; on the other side, foreign governments have a good expectation on China's macroeconomic performance, so a lot of money flows into China and foreigners increase the demand of RMB , external dual pressure and domestic firm economic backing making the RMB against the U.S. dollar has appreciated nearly 20% since 2005. On one hand, RMB's appreciation prompts external purchasing power, making our country's import capacity increase and the people's living standards improve relatively; on the other hand, it weakens the exporting enterprises' competitive capacity and has an effect on international balance of payments, at the same time,lots of hot money inflows posing threat to financial system stability. Therefore, finding the reasonable RMB exchange rate is essential for the economy sustainable development.This paper which is based on relative purchasing power parity theory analyses the relationship between the changing ratio of two currencies' price and determined exchange rate, using Chinese and American data to verify the fluctuation of RMB exchange rate. Using measurement method judges the purchasing power parity's explanatory power, then proposes advices according the result.This paper can get the following conclusions: (1) according the regression analysis,purchasing power parity theory is tenable ; (2) the United States CPI has a bigger effect on RMB nominal exchange rate than Chinese CPI,so China should implement the currency system which is pegged to inflation.Finally, the text summarizes the shortcomings of the research, and proposes the ideas and proposals of the future in-depth study. Noted that future research could expanded purchasing power parity theory, loosen the assumptions to make it more suitable for real economy, and more applicable for explaining the economic phenomena.