The Empirical Analysis On The Real Exchange Rate Of RMB Based On The Balassa-Samuelson Effect

Balassa-Samuelson theory claims that if a country is processing a quick improvement in tradable department, the wage of non-tradable department will rise, which affects the level of overall price and ultimately causing a rise in the real exchange rate. Since the reform and opening-up, the economy of China grows fast, which brings the rapidly increasing productivity of tradable department. However, it is seems the real exchange rate of RMB does not rise according to the Balassa Samuelson theory. The article, considering the exchange rate reform in 1994 year and Chinese economic features, makes some adjustments in Balassa-Samuelson theory, then tests Whether China is in line with it.Based on the theoretical research above, the paper constructs relative labor productivity difference on RMB Balassa-Samuelson Effect model by selected 32 years'data from 1981-2012 of China and other eighteen countries (regions) and considering manufacturing as the tradable section, service industry as non-tradable section. According to significant RMB exchange rate reform in 1994 year, this paper takes 1994 year as a cut. Then 1981 year to 2012 year breaks into two sections, which are 1981 year to 1994 year and 1995 year to 2012 year. For the period 1981 year to 1994 year that is fixed exchange rate, this article builds co-integration test of relative productivity difference and price ratio of tradable department goods and non-tradable department goods. However, for 1995 year to 2012 year that is floating exchange rate, on the premise of ensuring Balassa-Samuelson Effect's theoretical core, the paper provides systematic analysis and research on its original models. Considering Balassa-Samuelson Effect just analyze the changes of real exchange rate from the supply side, the paper extends the research by introducing rural population ratio and government expenditure ratio respectively. Based on empirical results, Balassa-Samuelson hypothesis is confirmed in China, Relative labor productivity difference and government expenditure ratio have positive effect on real effective exchange rate.This paper argues China should accelerate the adjustment of economic structure and narrow the gap between the two sectors gradually by taking greatly improving the productivity of non-tradable section. China should focuses on consumption of domestic residents instead of the dependence on exports. Finally restructuring and deepen the exchange rate system is also necessary.