Study Of RMB Equilibrium Exchange Rate

Exchange rate, an important parameter of the internal and external economy of acountry, is a critical consideration to lay down the economic policies, measure the state ofeconomical operation and attain the economic profits. With the global economicintegration, the formation of exchange rate is a complicated process decided by political,economical and financial factors of many countries.Equilibrium exchange rate, the core content of exchange rate theories, is a standard tojudge whether the exchanged rate in one country is overvalued or undervalued. Since thereform of RMB exchange rate, governments and scholars have debated over the formingmechanism of RMB exchange rate and how to set a reasonable exchange rate standardeffectively. The reasonable exchange rate standard plays a vital part in the effectiveallocation of resources, because it is not only related to the sustainability of the externalbalance of a country, but also a necessary guarantee of the stability and sustainability ofmacroeconomy of a country. Therefore, it is of great significance to study the RMBexchange rate in terms of Chinese economy.First, this paper briefly introduces the literature review about the study background,significance and researches home and abroad and gives a brief introduction to the basicconcepts of exchange rate, the developments of equilibrium exchange rate and RMBexchange rate mechanism. Then, the paper carries an empirical study on RMB equilibriumexchange rate through constructing a simple equation model based on the traditional BEERmodel. And it studies the factors affecting the RMB equilibrium exchange rate from1996to2012and the extent of imbalance of exchange rate. This paper adopts the researchmethod of qualitative and quantitative, contrast and induction. The originality of this paperlies in choosing total factor productivity instead of GDP as the standard to measure theeconomic development, thus getting the percentage of RMB exchange rate imbalance. Andwith the use of H-P filter analysis it analyses the effects of all the factors on the RMBequilibrium exchange rate in the long term and indicates that it is a common phenomenon of imbalance due to the real exchange rate fluctuating with equilibrium exchange rate. Last,the paper analyses the influence of RMB real exchange rate misalignment on Chinesemacroeconomic balance, and gives some suggestions to improve the imbalance of RMBexchange rate.