Empirical Study Of The Correlation Between The Effective Exchange Rate And China's Foreign Trade

In recent years, with the trade surplus of China continuously increasing every year, our trade partners are pushing for the appreciation of RMB. The government of China is facing more and more problems due to trade surplus. The exchange rate of RMB to US dolor is keeping increasing during 2006 - 2007. But what really influences our balance of payments is the real effective exchange rate of RMB(REER). To accurately analyze the effects of REER on our export, it is essential to accurately calculate REER. Currently, the real effective exchange rates of various countries are published by International Monetary Fund (IMF), but it is not clear to us how they calculate REER. Due to the importance of REER to our foreign trade development, the calculation methods of REER were explored in this dissertation to find the approximately same method as IMF. Effective measures will be taken in advance before the change of exchange rate if we know about the approximately method of IMF. The correlation between the change of our exports and the change of exchange rate was analyzed based on the calculations.The theories of exchange rate determination and adjustment of balance of payments were elaborated in this dissertation. With extensive calculation, 18 results of REER, which were yielded by arithmetic and geometric weighted average calculations based on export, import and import-export with sample currencies of 10, 15, 20 respectively, were comparatively analyzed and a method highly related to IMF was determined. Currently, this method was adopted by State Information Centre to calculate monthly REER. Based on calculations, the change of REER was analyzed and variables in model were passed the augmented Dickey-Fuller (ADF) test , Granger causality test and cointegration tests by Eviews3.1. A long-term stable cointegration model was established among the real export of China, REER and real gross domestic product (GDP) of our trade partners. We also analyzed error correction model and the response of export to REER and GDP.