Research On RMB Equilibrium Exchange Rate Mechanism

Exchange rate is the ratio of two currencies,reflecting the international purchasing power of currency.Today,the world economy is in an open environment,and exchange rate plays an important role in the communication among countries.The change of exchange rate is not only affected by the level of economic development at home and abroad,inflation,economic policy and so on,in turn,the change of exchange rate can also cause the change of other economic variables,such as the international flow of capital,price movements,trade balance,etc.Studies have shown that both undervaluation and overvaluation of exchange rate misalignment can cost the country's economic development and even cause panic.Whether the exchange rate fluctuation is in equilibrium interval shows that whether a country's resources are effectively configured,social economy is stable and orderly developed.It is also the reference for government to make reasonable exchange rate policy and adjust exchange rate.Along with the increasing degree of opening to the world and international status of China,reasonable estimates of RMB equilibrium exchange rate is important to the construction and perfection of China's socialist market economic system,and even the healthy and orderly development of the world economy.Over the years,the RMB exchange rate has attracted the attention of all sectors of society in the process of internationalization.In October 2016,RMB officially joined the SDR,which is a landmark event on the path of RMB internationalization.The RMB exchange rate has attracted more and more global attention.Since July 2005,the Chinese government declared a currency system reform,the RMB exchange rate is in a trend of overall increasing.Up to October 2016,the RMB nominal exchange rate to dollar has raised by 33.27%,the real effective exchange rate has raised by 42.37%,but our trading partners still think that the RMB is grossly undervalued.It has become one of the focus of the current global political and economic problems.This paper aims to study the equilibrium exchange rate of RMB through the behavioral equilibrium exchange rate theory(BEER),and then form a conclusion to make suggestions on the reform of China's foreign exchange system.In the first two parts of this paper,the author first introduces the related concepts of exchange rate and its influence to the economic variables,then teases the purchasing power parity theory,behavioral equilibrium exchange rate theory,the basic theory of equilibrium exchange rate theory,equilibrium exchange rate and generalizes the natural real exchange rate theory,and then put forward the research contents and methods of this paper.According to the analysis of the research results on RMB equilibrium exchange rate,this paper holds that the behavioral equilibrium exchange rate theory is applicable to China's current economic situation.This theory fully considers the endophytism of equilibrium exchange rate,believes that in the medium to longer term,the equilibrium real exchange rate is decided by a series of basic economic variables,the result is more conform to the actual economic situation.At the same time,the model mainly uses the co-integration analysis method to establish the empirical equation,which has strong operability.The third part analysis the movements of RMB exchange rate and the influence factors of RMB equilibrium exchange rate.Under the guidance of theoretical model,the main research results of the empirical experience and current situation of the RMB exchange rate movements,the author selects the price level,monetary supply and demand balance,the terms of trade,financial revenue and expenditure and labor productivity,which are five typical variable indexes that can reflect the characteristics of the Chinese economy.The fourth part carries on the empirical analysis,which is also the key part of this paper.The theoretical basis of the empirical study is the BEER model proposed by McDonald.On the basis of the original model,combining with the specific circumstances of economy in our country,this article revises and improves the original model,setting up a RMB equilibrium exchange rates model which is decided by price level,monetary supply and demand balance,the terms of trade,financial revenue and expenditure and labor productivity.The real exchange rate model of RMB equilibrium is constructed as follows:Equilibrium exchange rate REER=f(COM,M2,TOT,GOV,PROD).The fifth part using cointegration theory,error correction model and H-P filtering method to estimate the level of RMB equilibrium exchange rate in our country and the corresponding degree of currency misalignments,then draws the conclusion that the price level,monetary supply and demand balance,the terms of trade,financial revenue and expenditure and labor productivity are important determinants of short and long term RMB equilibrium exchange rate.Among them,monetary supply and demand balance,the terms of trade,financial revenue and expenditure have positive effects on equilibrium real exchange rate,while the price level and the labor productivity has reverse effect on the equilibrium real exchange rate,which is consistent with theoretical analysis.In addition,this paper calculates the disturbance degree of the RMB real effective exchange rates,indicates that RMB real effective exchange rates have been moved around the equilibrium effective exchanges rates for more than a decade,sometimes overvalued or undervalued,the highest degree in disorder close to 20%.The obviously overestimated stage of RMB mainly includes 1996-1998,2001-2003,2001-2009 and 2014-2009,and the significantly undervalued stage of RMB mainly includes 1994-1995,1999-2000,2003-2008,2009-2013,2016-2017.The sixth part evaluates the reform of RMB exchange rate system according to the results.It will be more conducive to the healthy development of China's economy to improve the existing mechanism of RMB exchange rate and to realize a managed floating exchange rate system based on market supply and demand.Finally,the seventh part comes to the conclusion.