A Study On The Influencing Factors Of RMB Real Effective Exchange Rate

China's economy continued to grow rapidly since the reform and opening up. With the constantly improving level of China's opening up to the outside world since the accession to the WTO, RMB exchange rate, which reflects changes in China's economic fundamentals and adjusts internal and external economic relations, has been attracting more and more attention. Domestically, in order to meet the needs of national economic development and opening wider to the outside world, the RMB exchange rate regime has undergone a total of eight stages of evolution since the founding of New China, in which the exchange rate reform in 1994 and 2005 reform affected profoundly. On foreign terms, some Western countries have begun to advocate "RMB appreciation" since 2002. They believed that China kept its currency artificially low and output deflation, which leads to global economic imbalances. The calls for appreciation of RMB culminated after the U.S. financial crisis. Chinese and foreign scholars have different opinions in response to the existence of undervalued RMB issue. Therefore, before answering whether the RMB is undervalued, clarifying factors which affects the real exchange rate of RMB becomes urgent and necessary. It is the prerequisite for answering the need for a substantial appreciation of RMB. The purpose of writing this article is based on this.Scholars usually explore the influencing factors of the real effective exchange rate from two angles. One is real shocks and the other is nominal shocks. Real shocks include supply shocks where real impact of changes in productivity as the main content and demand shocks where government spending as the main content. The nominal impact mainly refers to impact of monetary policy changes on the real exchange rate. Therefore, this paper reviews previous studies on the issue from productivity changes, government spending and money supply. Balassa - Samuelson effect explains changes in currency exchange rates of the rapid productivity catch-up countries. It has a good explanatory power to the currency exchange rate trend in developed countries after World War ?. Balassa-Samuelson hypothesis enriched productivity catch-up effect on the real exchange rate mechanism after expanding, making its currency fluctuations on developing countries also have better explanatory power. Government spending has indirect effects on the real exchange rate by affecting consumers. Theoretical studies suggest that the impact of government spending to real exchange rate is the result of the combined effects of resource exit channels and consumer tilt channels. Resource exit channels shows an increase in government spending will lead to the appreciation of the real exchange rate, while consumer tilt channels shows the effects on the real exchange rate is uncertain with an increase in government spending. Overall, government spending increase will lead to the appreciation of the real exchange rate, which has been widely validated on empirical leveL The effect of an increase in money supply to the exchange rate was a long-standing debate among scholars before 1970s. Dornbusch settled the argument by developing "exchange rate overshooting" model based on price stickiness. Empirical studies showed that the impact of monetary policy shocks exists exchange rate overshoot phenomenon mostly in developed countries, but not significant in developing countries. A common conclusion is that there is a negative correlation between monetary shocks and exchange rate fluctuation. And monetary shocks affect a lesser degree to exchange rate than supply shocks and demand shocks do.Firstly, starting from the real effective exchange rate calculation method, we recursively induce the mechanism of real effective exchange rate and make theoretical analysis of the factors affecting the real effective exchange rate. Then we preliminary analyze the reasons for fluctuations in the real effective exchange rate of RMB on the basis of reviewing the evolution of RMB exchange rate regime and fluctuation trends in the long terra We make empirical research of 1994-2012 RMB real effective exchange rate by using Behavioral Equilibrium Exchange Rate model, analyzing the influencing factors of RMB real effective exchange rate in detail. Co integration test results show that Chinese productivity, terms of trade, openness, overseas investment intensity, government spending and the money supply have equilibrium relationship with the RMB real effective exchange rate. And we get standardized co integration equation accordingly. The empirical results show that Chinese government spending and changes in productivity have a positive correlation with RMB real effective exchange rate, and international economic environment and money supply have a negative correlation with RMB real effective exchange rate. The finial part is basic conclusions and policy recommendations of this article, we expound the nature of RMB appreciation and recommend how to ease international pressure on RMB appreciation.