The Researching Of Renminbi Real Effective Exchange Rate

On July 21st 2005, the People's Bank of China declares thatRenminbi exchange rate will adopt managed floating exchange ratemechanism. The exchange rate will be determined by the supply and thedemand of the foreign exchange market, and adjusted by a basket offoreign currencies. This is a significant step of Renminbi towards freelyfloating. Then many researchers and civilians focus on the Renminbiexchange rate. Under this circumstance, the article makes someresearches on the Renminbi exchange rate. The exchange rate researchedin the article is not the nominal exchange rate, but the real effectiveexchange rate which is the real factor to influence the macroeconomicand which is a kind of multilateral exchange rate.Theories' researches indicate that exchange rate misalignment,whether overvalued or undervalued, will corrupt the welfare andefficiency of the economic. The article utilizes the equilibrium exchange rate model of Elbadawi and the Cointegration theory to establish model,concludes that real effective exchange rate, terms of trade, total reservesand degree of openness have the long-term stationary relations. UsingHodrick-Prescott filter to smooth the data ofterms of trade, total reservesand openness, and then inputting the data into cointegration equation, weget the equilibrium exchange rate. Compare the real effective exchangerate with the equilibrium exchange rate, the article analyzes the reasonand degree of the exchange rate deviation from 1980 to 2004.By analyzing the deviation of the exchange rate, we know that theRenminbi real effective exchange rate runs nearby the equilibrium levelonly in the minority years, while runs under misaligned level in themajority years. The Renminbi real effective exchange rate fluctuatesaround the equilibrium level, not continuously be overvalued orundervalued. The real effective exchange rate exhibits mean-revertingtendency.In order to study the mean-reverting, the article uses the SmoothTransition Auto-regression model (STAR) which is a kind of SwitchingRegime model. By analyzing the real effective exchange rate monthlydata from December 1979 to June 2006, the article adopts the LogisticSTAR model to describe the mean-reverting of exchange rate, namelylarger deviation leads to quicker reverting, the reverting presents thenon-linearity, and the reverting dynamics is different by the positive and negative direction deviation. The Logistic STAR model figures theregime switching caused by abolish the exchange rate of inner settlementin January 1985.The article summarizes parts of the researching outcomes of theexchange rate, equilibrium exchange rate and Renminbi exchange ratetheories, reviews the evolvement of Renminbi exchange rate system from1949 to 2006, and introduces the theories and models applied in thefollowing empirical researches, then makes empirical researches withRenminbi real effective exchange rate by Elbadawi model and STARmodel, and finally gives the conclusion.