An Empirical Research Of RMB Equilibrium Exchange Rate Based On ERER Model

Exchange rate is an important part of financial market, which links the domestic financial market to the international market. Besides, it plays an important role in the distribution of resources. In July2005, our country reformed the RMB exchange rate mechanism. Since then, the exchange rate would be determined by the supply of a basket of currencies, and the nominal exchange rate has been continuously appreciating. Right now, the RMB exchange rate becomes the focus of economists. Under this circumstance, the article makes some researches on RMB. The equilibrium exchange rate is based on the real exchange rate, not nominal exchange rate, and the real exchange rate is measured by real effective exchange rate which is a multilateral exchange rate and issued by IMF.Whether undervalued or overvalued, the exchange rate will cause negative effects to the economy. The previously theories and researching outcomes about equilibrium exchange rate of RMB are summarized in the initiate part of this article. Then based on the ERER model, we can draw a conclusion that real effective exchange rate, government expenditure, terms of trade, technique, trade openness and net foreign assets have a long run stationary relationship. What’s more, via VEC model, we can see that the RMB has a preferable self-correcting mechanism. At last, use H-P method, we can calculate the equilibrium exchange rate of RMB, and we can find out some reasons about the misalignment of the real effective exchange rate by reviewing the alteration of exchange rate regime of our country. Besides, directing at the defect of exchange rate mechanism, some advice is provided.