Research On Non-linear Dynamic Models Of RMB Real Exchange Rate

The exchange rate is a very important variable of a country's internal and external equilibrium under today's open economy. It is quite meaningful, therefore, for the macroeconomic research of one country to learn the dynamic behavior of the exchange rate. Domestic description of dynamic behavior of RMB exchange rate and the research on its forecast are still in the initial stage. The stiff exchange rate regime in China before the reform of RMB exchange rate regime on July, 21, 2005 - little volatility of RMB exchange rate, the inconvertibility of RMB under the capital account are the major factors and the lack of effective historical data which are responsible for limits on the research in this regard. The real exchange rate of RMB, therefore, is chosen as the objective of this study.Firstly, the international exchange rate theories are reviewed, on the basis of which one—variable autoregressive models of time series are put forward. Then, according to analyzing real exchange rate theories and the properties of RMB real exchange rate, a linear autoregressive model and two nonlinear regime switch models are selected as tools for the research. Estimating these models and fitting sample data lead to a conclusion that the smooth transition autoregressive model is the best one which describes the RMB real exchange rate behavior well.All outcomes indicate that RMB real exchange rate bears the characteristic of non-linear dynamic behavior and asymmetry, i.e. different-size and different-sign shocks have different influences on the dynamic behavior of RMB real exchange rate.