A Research About Deviation Of RMB Nominal Exchange Rate And Purchasing Power Parity

The exchange rate is one of the core issues of international finance and international trade. Domestic prices and international prices of commodities are interrelated through exchange rate which plays the role of price conversion. This paper focuses on the exchange rate deviation which could be defined the ratio of the nominal exchange rate and purchasing power parity. If the exchange rate does not exist deviation, then the ratio equal to the constant 1.Because of underdeveloped China’s market economy, difference of domestic and international markets and the reform of the exchange rate regime, the nominal exchange rate of RMB is often much larger than purchasing power parity. So, the deviation is always greater than 1.Greater deviation is extremely unfavorable of the sustainable development of our economy. It is necessary for us to take measures to control deviations into a reasonable range.Deviations fluctuation may be caused by the nominal exchange rate or purchasing power parity, but in most cases it is caused by both two. In this paper, the latest progress of the research should be summarized and evaluated. Through the time series model, we would comprehensively analyze how the international and domestic four factors,(1)domestic and international commodities prices ratio;(2)trade openness;(3)Chinese wealth;(4)broad monetary supply M2;affect the deviation of the RMB nominal exchange rate and purchasing power parity(PPP).The studies have shown that : domestic and international commodities prices ratio and Chinese wealth are two key factors to explain the deviation, and they are negatively correlated with bias. The trade openness and the monetary supply are positively correlated with deviation to a lesser extent. The influence of four factors on the deviation is not only long-term effects, but also the short-term effect is very obvious.Then this paper analyzes the negative effect of exchange rate deviation. From our international market integration, GDP accounts and long-term international trade balance, we analyze that how the deviation of the exchange rate influence the economy. Moreover, we give the concrete measures to adjust the deviation. Therefore, we do not evaluate the RMB exchange rate just from the purchasing power parity theory. We should consider the reasonableness of the RMB exchange rate from the perspective of the exchange rate deviation. Although China’s market economy is not developed enough, in the long run, RMB exchange rate can basically reflect the fluctuation trend of purchasing power parity. The deviation of RMB nominal exchange rate and PPP will shrink and maintain at a reasonable range.