An Empirical Investigation On The Balance Of RMB Exchange Rate: 1986-2006

With the acceleration of the process of global economic integration, exchange rate has played an important role in promoting the development of the national economy. China is currently implementing a managed floating exchange rate system. It is urgent to adjust the exchange rate timely and appropriately so as to serve the macroeconomic level. As one of the core exchange rate theory, equilibrium exchange rate theory is the important theoretical basis of judging the level of exchange rate. Compare the real exchange rate with the appropriate level of the equilibrium exchange rate, and then determine whether to adjust the exchange rate. Through the analysis of the impact of exchange rate changes on different economic levels, thereby determining how to adjust the exchange rate. Therefore, it is of great practical significance to make a balanced judgment so as to serve on the macroeconomic targets. Based on the two key issues, this paper firstly establishes the basic analytical framework of the RMB equilibrium exchange rate based on the amendment to the equilibrium exchange rate model. Secondly, this paper estimates a cointegration analysis equation in the long period, and VECM responding the adjustment in the short time. In order to get the"sustainable"or"permanent"values of the fundamental approximately, this paper use Hodrict-Prscott filter to smooth the time series. The equilibrium exchange rate is derived and the misalignment is also calculated. In order to simulate the economic effects of exchange rate changes, this paper firstly established a small macroeconometric model of simultaneous equations, and identifies it with regulating conditions. Then estimates the simultaneous equation systems with three-stage least squares. On this basis, through the designing of eight different scenarios, we get the economic impact of the imports and so on. According to this, we can provide a theoretical basis and direction on the adjustment of the RMB exchange rate. The results show that there have been two overestimation and two underestimation since 1990. However, the degree of imbalance has been under 10% since 1994 and decreased gradually. Among them, RMB real exchange rate in 2000 and 2003 is close to the balanced level. Whether horizontal or vertical comparison, the analysis of the simulation results show that misalignment has a negative impact on the macroeconomic level. And accompanied by the increasing degree of misalignment, the adverse affect is more notable. Equilibrium exchange rate and the real exchange rate are endogenous variables. The changes of those are the results of economic structure adjustment. From this point of view, the equilibrium exchange rate is only an intermediary target. What we ultimately needed is to achieve the overall economic balance through the exchange rate. Therefore, the basic ways of improving appreciated management of real exchange rate include continually deepening marketilization, and system reform and regime innovation, and adding flexibility of microeconomic policies, especially exchange rate policy.