Study On Balassa-Samuelson Effect Of RMB Real Exchange Rate

Balassa-Samuelson effect is the classic real exchange rate theory which explains the systemic changes of the real exchange rate in the long run from the perspective of supply. Its core idea is that in the process of sustained economic growth, the local currency will experiences a real appreciation, as the tradable sector labor productivity relative to the nontradable sector increase rapidly. Since reform and opening-up, China’s economy has experienced sustained rapid growth, with an average annual growth rate as high as9.9%. In contrast, the RMB real exchange rate has experienced a continued sharp depreciation in the quite a long time early and a progressive appreciation in recent years. Superficially, there is an apparent contradiction between the theoretical expectations of the Balassa-Samuelson effect and the reality of China’s economic development since1978. This contradiction has become some scholars and politicians’ reason who assert the RMB is undervalued and ask the appreciation of RMB. Therefore, a thorough study of Balassa-Samuelson effect in China will contribute to realizing the regular pattern of RMB real exchange rate’s change in the long term and reasonably dealing with the pressure of RMB real appreciation.The article selects1978to2012period of China’s rapid economic growth as the sample period, and selects bilateral real exchange rate in RMB yuan against the US dollar as the research object. Firstly, based on the method of real exchange decomposition, the article chooses sector GDP deflator and PPI as the proxy of tradable goods’ price and carefully analyses the trend and the internal structural features of the RMB real exchange rate. Then, based on analysis of RMB real exchange rate, the article improves the empirical model of Balassa-Samuelson effect, and uses empirical analysis to test the relationship between RMB real exchange rate and China’s labor productivity of tradable sector relative to nontradable sector. As the conclusion of the study manifests, in the sample period, tradable goods real exchange rate has depreciated substantially but China’s internal real exchange rate has appreciated all the time, and tradable goods real exchange rate has a determinant effect on adjustment of RMB real exchange. Therefore, it is necessary to consider tradable goods real exchange rate when testing Balassa-Samuelson effect. The results of empirical model which has been improved in the article demonstrates that the core process does take effect in China, and regression function fits better when using the data based on sector GDP deflator. Meanwhile, after taking the fact that tradable goods sector deviate from PPP theory into consideration, the classical Balassa-Samuelson effect exists in the adjustment of RMB real exchange, which means the improvement of China’s labor productivity of tradable sector relative to nontradable sector produces the positive pressure of RMB appreciation.