Supply Shocks, The RMB Equilibrium Real Exchange Rate And Its Economic Effect

After entering the1990of the20th century, China’s economy gradually transformed from a comparatively isolated economy to an open economy, and maintaining a double-digit high-speed growth year round. In2001, China’s accession to the WTO, the double surplus of the current account and capital account make China’s foreign exchange reserves continuely increasing, therefore the RMB appreciation faces to increasingly strong expectation. As an important price leverage in open economy, the decision of the real exchange rate equilibrium has noticeable theoretical orientation significance to promote macroeconomic achieve the internal and external balance. Exchange rate system reform started in1994(hereinafter referred as the exchange rate reform),transformed RMB exchange rate from traditional accounting measurement tool to the direction of the market price variable. The steady growth of the Chinese economy since the exchange rate reform provides a desirable sample for the RMB equilibrium exchange rate problem studies.In this paper, based on existing researches, taking full consideration of the background of China’s dual economic structure and the recessive unemployment, expanding the Balassa-Samuelson effect (hereinafter referred as the BS effect), and on the basis of this study, using the behavioral equilibrium exchange rate model (BEER) to re-estimate the equilibrium level of real exchange rate of RMB, and measuring the misalignment of RMB real exchange rate. This paper uses the exchange rate reform start year1994as the starting point of the sample period, choosing exchange rate that is more marketing price variable as the measure index, and using the high-frequency quarterly or monthly data in the relevant sections in order to enhance the data information amount, to increase the robustness of the test results.This paper mainly includes: First, on the basis of a brief introduction to the concept of exchange rate indicators, taking a brief analysis on bilateral external real exchange rate of RMB against U.S. dollar and RMB real effective exchange rate movements. Then, following the perspective of the history evolution, this paper takes a review of the exchange rate determination theory, and making a brief description on latest research progresses.Secondly, due to the supply shocks, there exist inherently systemic biases when using purchasing power parity as the equilibrium real exchange rate measure standard. After introduction of the source of BS effect and its transmission mechanism that is the core analytical framework of supply shocks, given a mathematical derivation of the BS effect with existing literatures, and choosing the real effective RMB exchange rate to test the applicability of BS effect in China. The result indicates that the traditional BS effect is invalid in China. Considering the unique dual economic structure, recessive unemployment and structural transformation background into account, this paper expands the BS effect with demographic factors and making a re-examination. The results shows BS effect is present in China after considering demographic factors.Thirdly, from view of traditional purchasing power parity model, this paper test the purchasing power parity theory (hereinafter referred to as PPP) with three types of variables, to verify whether the bilateral external real exchange rate of RMB against U.S. dollar correspond with the PPP, in order to determine whether use PPP exchange rate as a standard of the equilibrium real exchange rate. The results show that the bilateral external real exchange rate of RMB against U.S. dollar does not meet PPP, purchasing power parity (PPP) exchange rates is not suitable for the standard of the RMB equilibrium real exchange rate.Fourthly, based on the study of supply shocks in this paper, using behavioral equilibrium exchange rate model (BEER) to re-estimate the equilibrium level of the RMB real exchange rate, and measuring of the RMB real exchange rate misalignment. The empirical results show that the behavioral equilibrium exchange rate model is a reasonable analytical framework of RMB equilibrium real exchange rate, and in the sample period, the real exchange rate of RMB has experienced three overestimate periods and four underestimate periods, and all the misalignment degree are within10%, no serious misalignment exist.Fifthly, after measuring tradable abilities of the China’s three major industries, to determine the division of the tradable sector and the non-tradable sector, and based on the research of RMB real exchange rate misalignment, this paper making a brief analysis of the impact of the RMB real exchange rate misalignment on the overall economic growth and sub-sector economic growth. The results indicate that the RMB real exchange rate misalignment has an important influence on China’s real GDP growth. The underestimated of RMB real exchange rate conducive to improving China’s real GDP growth rate; overvaluation of RMB real exchange rate will make China’s real GDP growth fall and the impact of overvalued exchange rates is greater than underestimated.