The Equilibrium Exchange Rate And The Macroeconomic Effects Of Exchange Rate Changes

Renminbi(RMB)equilibrium exchange rate and macroeconomic effects of exchange rate fluctuation is a heatedly deputed and inevitable problem. The reason why it is so-called to be heatedly deputed is that, on the one side, since 1990s domestic researchers have disagreed with each other about the determination and measurement of RMB equilibrium exchange rate, macroeconomic effects of RMB exchange rate fluctuation and consequently with RMB exchange rate formation system etc., on the other side, there are still no much consensuses in many aspects. The reason why it is so-called to be inevitable is that, with deepening of China's economic openness, RMB exchange rate policy will be confronted with more and more challenges, and its orientation will be attached more and more importance.International Finance is one subject in research of achieving simultaneous internal and external balances for one economy from the perspective of monetary finance(Jiang-Boke, 1999a). And because the variable of exchange rate is the focus of achieving simultaneous internal and external balances, so it is nessesary to investigate this variable for achieving simultaneous internal and external balances. This dissertation makes systematic researches theoretically and empirically on the problems on the determination and measurement of RMB equilibrium exchange rate, on the macroeconomic effects of RMB exchange rate fluctuation, and also on how exchange rate fluctuation and exchange rate misalignment influence the choice of the optimal exchange rate band. On such basis, the dissertation also re-defines equilibrium exchange rate. The definition of equilibrium exchange rate here refers to internal real exchange rate which requires that, on the one hand, domestic non-tradable goods markets must be under equilibrium, on the other hand, current account balance should be sustainable. Here, the current account balance that we attach more importance to does not need to be zero for each period, but to be sustainable as long as its net discounted value of the intertemporal balance is under equilibrium. The dissertation includes six chapters:Chapter one is introduction. The chapter first makes some descriptions on the background, goal, subject and method of this dissertation, and then surveys the current studies on equilibrium exchange rate and macroeconomic effects of exchange rate fluctuation. Finally, the chapter is followed by the discussions of study means, structure arrangement, innovations and weaknesses of this dissertation and some basic concepts of exchange rate.Chapter two analyzes the preconditions of the study on RMB equilibrium exchange rate and macroeconomic effects of exchange rate fluctuation through using RMB exchange rate to test real exchange rate stableness and Purchasing Power Parity(PPP). The study shows that neither real exchange rate stableness nor PPP can be supported by China's data,. This implies that Chinese government should find an alternative to explain real exchange rate unstableness, and this alternative must be able to guide RMB exchange rate policy so as to minimize the negative impacts when facing internal and external imbalances. The chapter first analyzes the necessities of empirical test for real exchange rate stableness and PPP in brief. Then, the chapter introduces the definition and types of real exchange rates, and analyzes the quantitative relations between these different types of real exchange rates and their trends with RMB real exchange rates. And the chapter also makes some generalizations on PPP and its current studies. Finally, the chapter uses two different types of RMB external real exchange rates to make empirical test.Chapter three introduces, compares and assesses current western typical equilibrium exchange rate models systematically. These typical models include: Fundamental Equilibrium Exchange Rate, Macroeconomic Balance Framework Equilibrium Exchange Rate(IMF Model), Behavioral Equilibrium Exchange Rate, Intermediate-term Model-based Equilibrium Exchange Rate(ITMEER Model), Natural Equilibrium Exchange Rate, and Equilibrium Real Exchange Rate. And the last one is composed of Edwards Model, Elbadawi Model and Montiel Model. The chapter argues that compared with other models, Fundamental Equilibrium Exchange Rate and Montiel Model have some advantages.Chapter four develops RMB equilibrium exchange rate model, and makes empirical study on RMB equilibrium exchange rate. The chapter first establishes appropriate RMB equilibrium exchange rate model in combination with the latest Equilibrium Real Exchange Rate(ERER) framework developed by lbadawi & Soto with the idea of external balance developed by Williamson & Mahar. The model argues that internal balance requires domestic non-tradable goods markets should be cleared, and external balance requires current account balance should be sustainable. Based on this model, the chapter then makes some qualitative analysis on the main conclusions derived from this model. And finally, the chapter makes empirical study with RMB, and based on this study, it also makes some deep investigations on the degree of RMB exchange rate misalignment since 1978. Chapter five analyzes macroeconomic effects of RMB exchange rate fluctuation through four main macroeconomic variables(that is, real output, price, employment and real wage). One of the goals of this chapter is to judge how Chinese authority can minimize the impacts of RMB exchange rate fluctuation from exchange rate adjustment when facing RMB exchange rate misalignment. The chapter first surveys current studies on macroeconomic effects of exchange rate fluctuation, and then by introducing uncertainty and rational expectation into traditional open economy AD-AS model, it develops a model which gives rise to explicit relations between exchange rate fluctuation and four above-mentioned macroeconomic variables. The chapter finally use China's aggregate and disaggregate(sort or sector)data to make empirical panel studies. Besides, the chapter also makes some simple investigations on the impacts on the four above-mentioned macroeconomic variables from one-step adjustment of RMB exchange rate misalignment based on the results of the panal studies.In combination with the concepts of exchange rate fluctuation and exchange rate misalignment, chapter six makes theoretical investigation on the choice of the optimal exchange rate band through the game between the policymakers and the public. The chapter first gives settings on the game model, and then reaches a general equilibrium solution through backward induction method. Finally, the chapter uses comparative static analytical method to make systematic investigation on the policymakers' choice of the optimal exchange rate band, and then makes some conclusions for the game model, and gives out some inspirations for RMB exchange rate regime reform.