Empirical Evidence And Theoretical Framework Of Real Exchange Rate Mismatch

China economy has been growing fast for decades,contributing to domestic economic reforming and globalizing.Among all those growth powers,economic opening is the most important growth engine.As distinctive characteristics of different economic development periods,the growth effects of global trade and international capital flows are experiencing structural changes,as long as the key price factor,exchange rate policy has experienced several switches as well.The exchange rate regimes switch of RMB,including single track system during 1979 to 1984,dual track system from 1985 and re-comping in 1994,as well as “721 exchange rate reform” in2005 for China globalizing development and “811 exchange rate reform” in 2015 to achieve bidirectional fluctuation,were designed to meet the need of economic opening strategy of China,and based on the period characteristics of economic development.Obviously,it will still be the core issue of double cycle development nowadays.However,the nexus between real exchange rate and economic growth has not come to a common end within theoretical research.Although,the famous Rodrik View and its fans are claiming positive growth effect of real exchange rate undervaluation with lots of empirical evidence,the conflicting results between empirical tests of cross-country panel data and individual economy indicate that the mechanism of Rodrik View cannot reveal the whole picture of real exchange rate growth effect,which makes RMB real exchange rate regimes choice lack theoretical foundation.But on the contrary,it also become the main issue of this paper.After reviewing literature of the relationship between real exchange rate and economic growth comprehensively,we notice that the Rodrik View is robust in developing economies which means real exchange rate undervaluation can foster economic growth,while insignificant in developed economies.This leads us to consider potential non-linear growth effect of real exchange rate mismatch.On the other hand,empirical tests of individual samples suggest counter-facts against Rodrik View,which can be additional evidence for non-linear hypothesis,as well as the missing mechanism.From a more general perspective,Rodrik View is mainly focusing on the direct growth mechanism from real exchange rate to gross demand,there still has another line of research caring the indirect growth effect of real exchange rate with total factor productivity.Literature reviewing shows that relative empirical tests of the indirect growth effect of real exchange rate are still struggling with mechanism discussing,variable definition and sample heterogeneity,and are unable to obtain significant results.Economic reality and theoretical logic have noticed us that real exchange rate as the core price channel of international trade and investment,its effect upon quantitative economic variables such as import,export,invest and output is impossible to be straightforward,the mechanism of its growth effect is much more complicated than theoretical framework revealed by those literature so far.So,there are three unsolved issues before we can discuss RMB real exchange rate with double cycle development strategy.First,the non-linear mechanism of real exchange rate direct growth effect,which can explain the conflicts among empirical literatures,as well can be robustly supported by economic reality.Second,a whole mechanism of real exchange rate indirect growth effect,which concludes all those paths discussed by relative literatures,and still has a significant empirical result.Third,developing a theoretical framework to merge direct and indirect growth effect of real exchange rate,and make it suitable for political simulation.For the first issue,this paper based on the heterogenous empirical evidence of relative literature,from the perspective of Mashall-Lener condition,developed the mechanism of direct growth effect of real exchange rate.We suggest that the huge difference between price elasticities of material goods and manufactural goods may cause contrary growth effect of real exchange rate in different economies.By separating economies into four dimensions with their net exports of raw material and manufactural goods,this paper suggests a threshold hypothesis of trade structure.After embedding our hypothesis into benchmark linear model,initial non-linear models with interactive terms,we infer that there may be threshold effect in second dimension and the boundary of the second and third dimension.By employing Hansen’s threshold panel data model,we empirically support our hypothesis,together with three robust tests in respects of variable definition,model specification and sample selection.Our finding can explain developing economies such as Russia can benefit from real exchange rate overvaluation,and developed economies such as Japan can benefit from real exchange rate undervaluation,to merge Rodrik View of cross-panel data with contrary evidence of individual samples.For the second issue,after carefully reviewing those relative literatures,this paper induces fragment mechanism of real exchange rate indirect growth effect,including the competitive effect,intermedia effect,development effect and structural effect of global trade,and the spillover effect of international capital flows.By merging them into a common framework,we suggest a hypothesis of dual-intermedia effect system,and obtain significant empirical evidence by employing system general moments method and a dynamic panel data model.Our finding indicates that the different effect direction of real exchange rate through global trade and international capital inflow is the very reason why empirical tests cannot detect robust significant results.For the last issue,this paper introduces the direct and indirect growth effect of real exchange rate into a dynamic stochastic general equilibrium model of a small open economy.By simulating real exchange rate overvaluation shock with a raw material export depending and a manufactural export depending economy,we confirm the robustness and consistence of the theoretical framework with our empirical evidence.Then this paper developed an initial framework for relative research.After we solved all those three issues above,can we employ our findings to the issue of RMB.By establishing the front mechanism of RMB real exchange rate mismatch to the position of currency account and financial account,and backward mechanism of currency account surplus and financial account surplus to economic growth,we forge the whole mechanism of RMB real exchange rate growth effect.Then,depending on period characteristics,this paper employs ARMA and TVP-SV-SVAR model to capture the time-varying pattern of backward mechanism,and consequently yields a predicted series of growth effect of RMB real exchange rate undervaluation.