The Structure Decomposition Of The Real Exchange Rate Of Rmb And The Research On The Determinants

The real exchange rate which is the relative price of goods and services in two countries has an important position in the world economy. And many previous scholars focus on the impact of the relative price of non-tradable goods and tradable goods on the real exchange rate. However, Engel (1999) discovered that it could only explain 10% of the real exchange rate fluctuations of the United States. There are some foreign literatures in this field, but there are not many literatures in the domestic. Therefore, this paper mainly studies the structure decomposition of bilateral real exchange rate of RMB and the determinants of relative price volatility in the bilateral real exchange rate fluctuation of RMB. In this paper, we choose four groups of different data(consumer price index and producer price index, consumer price index and weighted average of import and export price index, GDP index and producer price index, GDP index and weighted average import and export price index).The empirical results indicate that, the proportion of "relative price volatility" in the bilateral real exchange rate fluctuation of RMB is about 0.3-0.4 (by variance decomposition method and MSE decomposition method), therefore the law of one price plays a major role in the bilateral real exchange rate fluctuation of RMB. An indication is that the future research direction should be transferred to tradable goods prices deviate from the law of one price. From the rolling structure decomposition of the four sets of data, the proportion of "relative price volatility" in the RMB bilateral real exchange rate fluctuations have a large variation range, but most of them have a common the inflection point, and in recent years, the proportion is rising.After the structure decomposition of different sets of data, this paper continues to make an empirical study of the determinants of the relative price fluctuations in the real exchange rate fluctuations of RMB. Referring to the results of previous studies and the results of the decomposition, eight explanatory variables are selected, which are: economic growth, trade openness, net foreign assets, the proportion of working population,2007 virtual value, money supply growth, per capita GDP, government comsuption.Then we use the system generalized moment estimation method and the fixed effect estimation method to carry out empirical analysis of the four sets of panel data, and make the corresponding tests which can illustrate the rationality of these methods. From the empirical results, the trade openness, net foreign assets, the proportion of working population and 2007 virtual value are more robust, and the results show that:firstly, the larger the gap of trade openness between China and foreign is, the greater the effect of fluctuation of relative price of tradable and trade goods on the bilateral real effective exchange rate volatility is; secondly, the larger the gap of net foreign assets between China and foreign is, the greater the effect of the tradable goods price deviated from the law of one price of exchange rate will be; thirdly, the larger the gap of the proportion of working population between China and foreign is,the weaker the effect of "relative price volatility" in the bilateral real exchange rate fluctuation of RMB will be; finally, in recent years, "relative price volatility" in the bilateral real exchange rate of RMB fluctuation is becoming more important.