RMB Equilibrium Exchange Rate Theoretical Analysis And Estimates Of The Improved Model

The equilibrium exchange rate theory has some instructive significance on theresearch of RMB equilibrium exchange rate, but the equilibrium exchange ratemodel can not fit the trend of RMB exchange rate well. It is very necessary toestablish a innovative model of RMB equilibrium exchange rate based on theChinese basic national conditions and the macroeconomic equilibrium. This paperaims to consider Chinese basic national conditions, and explore the RMB exchangerate determination conditions and the restriction of RMB exchange rate. Then weresearch how factors of the supply and demand of market and external internationalenvironment Influence the decision of RMB exchange rate.Firstly, this paper describes and analyzes the domestic and foreign equilibriumexchange rate theory, and studies the calculation method of the RMB EquilibriumExchange rate. Then in accordance with the Chinese basic conditions, we explore theequilibrium exchange rate of RMB on the measurement method of using behavioralequilibrium theory, and research the effects of macroeconomic variables onformation mechanism of RMB equilibrium exchange rate. Then combined withChina’s macroeconomic equilibrium analysis, based on the long and medium andshort term fundamentals of the equilibrium exchange rate, we construct a model ofRMB equilibrium exchange rate. This paper uses the quarterly data from1996to2013, and makes cointegration analysis of RMB equilibrium exchange rate model,and writes a long-term equilibrium cointegration equation. Then we make errorcorrection in the long-term model, and get the short-term error correction model ofequilibrium exchange rate, and through the analysis of impulse we explore how explanatory variables impact the equilibrium exchange rate. Finally, we calculate themisalignment percentage for each period of RMB equilibrium exchange rate and thereal effective exchange rate using HP filtering method and the long-termcointegration model, and draw out the misalignment diagram of the RMB exchangerate. So we can analyze the RMB misalignment, and give the countermeasure toreduce the degree of RMB misalignment.Based on the model of BEER (Behavior Equilibrium Exchange Rate), thispaper explores the basic factors of RMB equilibrium exchange rate from the aspectsof trade liberalization, the development of the global economy, money supply anddemand and international market environment. Then we can establish theequilibrium exchange rate model in accordance with the basic situation of China.This paper considers the long, medium and short term factors on the RMB exchangerate decision, and innovatively uses some index, like fixed asset investment,economic growth, the real estate market and financial market. And this paper makesempirical research using the most recent data, and analyzes the misalignment ofRMB exchange rate. The short-term error correction model of exchange rate analysiscan be a very good fit to the actual situation, the RMB exchange rate misalignmentanalysis helps to identify the disorder causes. In the last part of the paper,countermeasures and suggestions which have certain practical significance are givenfor regulation. Pulse analysis of RMB equilibrium exchange rate short-term modelshows the impact of exchange rate of broad money supply on RMB equilibrium isbiggest. However, the effect of net assets abroad which reflecting China’s foreignexchange reserves on RMB equilibrium exchange rate impact is not so severe as ourimagination.We choose2010as the base period (REER2010=100), and a sample of61economies as a basket of currencies, then we adjust the nominal effective exchangerate of RMB compared with the price level of other60economies. The result is the real effective exchange rate of RMB. The real effective exchange rate of RMBexcludes the impact of domestic inflation and other factors, and it can reflect thefluctuations of the RMB exchange rate. Calculation of the RMB exchange ratemisalignment shows that the RMB exchange rate misalignment in1996-2013ismainly affected by two world economic crisis, and the real effective exchange rate ofRMB back to the equilibrium level is rather slow. China’s monetary authority shouldtake measures in the financial crisis to avoid substantial overvalue or substantialundervalue of the RMB exchange rate, and improve the resilience of the suddencrisis. The monetary authority should take full account of the bilateral exchange rateof surrounding trading economies, set weights according to the trade size, andremove domestic inflation and other factors, and get the index which reflects the realeffective exchange rate of RMB. Then the monetary authority can set reasonablefluctuation limit according to the degree of deviation from the index to theequilibrium exchange rate. The monetary authority should not be overly conservativein the range of exchange rate fluctuations, it should relax the range of exchange ratefluctuations and let the market play a role in regulation of supply and demand toreduce speculation.