Determinants RMB Equilibrium Exchange Rate

In recent years, China’s economy increasingly closely involved in internationaleconomic activities, the relations with foreign economies continued to deepen, thegross domestic product grew rapidly. Under such economic context, the exchange rateis increasingly becoming an important economic variable, a ligament of internationaleconomic contact, it influences almost all international economic activities. Theeconomic development of an open economy and the exchange rate system isinseparable. Since2005, China adopted the managed floating exchange rate systembased on market supply and demand with reference to a basket of currencies, theRMB exchange rate issue was increasingly becoming an important topic in theinternational economy. How to estimate the equilibrium exchange rate of the RMB,the degree of the RMB exchange rate misalignment, and making a reasonableestimate of the trend of the value of the RMB, has an important theoretical andpractical significance to China’s economic contacts with foreign economies as well asthe healthy development of the national economy.The paper first reviewed the course of the reform of the RMB exchange ratesystem, observed the development of the RMB exchange rate issue in a historicalperspective, and next, the classic exchange rate decision theory in the WesternEconomics were reviewed, in order to determine the basic economic factors affect acountry’s exchange rate. On that basis, the author chose the Behavioral EquilibriumExchange Rate (BEER) as an instrument to make an empirical analysis of theequilibrium exchange rate of RMB. In the variable selection process, the authorreferenced to the classic exchange rate theory analysis, chose six basic economicvariables-------‘the economic openness(open)’‘labor productivity(prod)’‘terms oftrade(tot)’‘money supply(m)’‘government spending(gov)’ and ‘domestic and foreigninterest rate differential(difr)’ as the equilibrium exchange rate explanatory variables,through the empirical analysis this paper determined the equilibrium exchange rateequation, measured the degree of the RMB exchange rate misalignment, and predictedthe future trend of the RMB.On the basis of theoretical analysis and empirical analysis, this paper drew thefollowing conclusions:(1) economic openness, labor productivity, terms of trade,money supply, government spending, and domestic and foreign interest ratesdifferential do affect the equilibrium exchange rate, but the direction and extent of theaffection are different.(2) for the long-term of the RMB exchange rate, exchange ratemisalignment is the normal, but the degree is low. And in the future period of time,the RMB exchange rate will remain the state of misalignment and steady appreciation.At the end of the paper, the author put forward a few suggestions of the RMBexchange rate system reform:(1) enhance the flexibility of the RMB exchange rate.(2)deepen the development of the foreign exchange market, increase market activity,increase market products.(3) ease the pressure of RMB appreciation and inflation in parallel.