Empirical Research Of The RMB Equilibrium Exchange Rate

Under the background of economic globalization, Exchange rate plays an important role in the national economic exchanges, and also is one of the main indicators of economic policy for most countries. With the upgrade of China’s economic status in the international arena, the RMB exchange rate has become the intersection of countries are concerned about. Since2003the increasing pressures for RMB appreciation never disappear, even after the exchange rate reform in2005. Even though RMB has gradual appreciate for seven years, the countries’ sound called on the appreciation of the RMB yet to stop. Under the pressures from all sides, compared with2005, as of March6,2013, the RMB has appreciated about24%. With such a large appreciation, we can not help thinking about that the appreciation of the RMB exchange rate is excessive or not? The equilibrium exchange rate of RMB can be a good answer to this question.The equilibrium exchange rate is generally defined as the exchange rate when internal and external macroeconomic both achieve balance. The equilibrium exchange rate at the same time is considered to be a reasonable level of a country’s currency exchange rate. The substantial continuing exchange rate misalignment will usually have a profound impact on the economy. The research of RMB equilibrium exchange rate not only can be used as criteria for judging whether the RMB exchange rate should be appreciation, and also can provide guidance for China policy authorities on the macro-control measures. The study of the real exchange rate of the RMB Equilibrium has great practical significance.The content of this paper consists of six parts. The first part explained the background of the topics, significance arrangements, innovation and lack, domestic and foreign research on equilibrium exchange rate. Part Ⅱ based on reviewing related concepts, this paper introduces the main Theory about the equilibrium exchange rate, including PPP, FEER, BEER, NATREX, ERER and BPEER. Part Ⅲ, on the basis of commenting the theory of the equilibrium exchange rate, this paper choose amended ERER model, considering the characteristics of China’s transition economy, finally choose variables for the terms of trade, openness, government spending, and net capital inflows, the domestic and international spreads and the proportion of state-owned enterprises. Then the paper use the EG two-step co-integration test, error correction model and impulse response function analysis, founding that the degree of openness, net capital inflows and the proportion of state-owned enterprises has continued in the short-term and long-term impact of the real exchange rate of the RMB, trade conditions in the long-term impacts the real exchange rate of the RMB, the domestic and international spreads and government spending in the short term impacts the real exchange rate of the RMB.Part Ⅳ evaluates the equilibrium real exchange rate and misalignment of RMB. The results show that, during1994.Q1-1995.Q4,1999.Q3-2000.Q3,2003.Q2-2008.Q2, the real exchange rate of RMB is underestimated. And during the period1996.Q1-1999.Q2,2000.Q1-2003.Q1,2008.Q3-2009.Q2,2011.Q4-2012.Q2is overestimated. after the third quarter of2009, the real exchange rate of RMB almost reached the equilibrium level.Part Ⅴ, based on the result of estimating RMB real equilibrium exchange rate and the exchange rate misalignment, the paper analyzes the economic effects of the exchange rate misalignment, and uses Johansen co-integration test to study the impact of the RMB exchange rate misalignment on import and export trade and FDI, founding that the RMB real exchange rate misalignment has negative impact on export trade and FDI. Finally, according to the results of the empirical research, the paper puts forward some relevant policy recommendations.Part Ⅵ in accordance with the conclusions of the empirical research, the paper made some relevant policy recommendations. The key to avoid exchange rate misalignment is to improve the RMB exchange rate regime; and improving the RMB exchange rate system should improve the construction of the foreign exchange market, and promote market interest rates, gradually liberalized capital controls, build RMB exchange rate target zone. Secondly, we should enhance the self-correcting ability of the economic system to the RMB exchange rate misalignment, and the key is to make the adjustment of wages and prices adjust more flexible. Again we should deepen the reform of state-owned enterprises, improving its corporate governance structure. Finally, we should make reasonable trade policies and capital policies.This paper uses theoretical analysis and empirical analysis to study RMB equilibrium real exchange rate. Based on commenting the main theory of the equilibrium exchange rate, we take the characteristics of the transition economies into account, adding the proportion of state-owned enterprises which is rarely considered in the previous research. This paper also use empirical analysis on the impact of RMB real exchange rate misalignment on the economy, including the impact on exports, imports and FDI. Small number of Chinese scholars empirical studied on the impact of RMB real exchange rate misalignment on import and export and economic growth. But the empirical research on RMB real exchange rate misalignment’effect on FDI was almost empty.