Empirical Study On Equilibrium Exchange Rate Of CNY

The disruption of Bretton-Woods system indicated that the long fixed exchange rate regime would be replaced by floating exchange rate regime. Countries around the world are speeding up the marketization of exchange rate under globalization and financial liberalization. Deep change in the international financial environment has aroused widely attention and research of exchange rate theory. On July 21, 2005, China announced to implement a managed floating exchange rate regime based on market supply and demand, with reference to a basket of currencies. Since the exchange rate reform started, the fluctuation range of CNY to USD has expanded to 0.5% in May 2007 from 0.3% on July 21, 2005. Appreciation range of CNY to USD has exceeded 20% until now. All above are important steps of CNY exchange rate mercerization.Lots of works and articles about determination of exchange rate can be found in western countries. But its application in researching the exchange rate field of emerging market nations started in the end of 1990s. Empirical study on issue of CNY exchange rate based on Purchasing Power Parity (PPP) can be divided into two parts, according to absolute PPP and relative PPP theories. Both are based on the equilibrium level before July 21, 2005. Considering the great limitation of PPP in CNY exchange rate field, Balassa-Samuelson effect is the most commonly used to explain the deviation between real exchange rate PPP. GSDEEMER in emerging markets targeted on long-run equilibrium exchange rate of developing countries, and had improved the long-term equilibrium level of exchange rate of countries such as Brazil, Chile, Mexico, South Africa and Indonesia in the process of constantly amendment since 1996.In this paper, the theoretical research method is based on Goldman Sachs GSDEEMER(Goldman Sachs Dynamic Equilibrium Emerging Markets Exchange Rates,1996), and we do a preliminary empirical study on CNY long-run equilibrium exchange rate issues compared with the PPP theory. Given other relevant variables such as the conditions of international trade, trade policy, capital flows and technological level under the conditions of lasting value, when the current and future expectation of non-tradable goods market is both clear, the internal balance achieved; when the current and future expectations of current account and long-term capital flows in line, the external balance achieved. The methodology behind GSDEEMER attempts to capture in a simple way some of the most salient macro-economic features of developing economies including large differences across countries and over time in trade regimes, the behavior of the terms of trade, the size and composition of government spending, and capital flows. GSDEEMER has been tested in some developing countries, and the results indicate that GSDEEMER can more accurately capture some special behaviors of exchange rate in emerging market to further estimate long-run equilibrium exchange rate of the currency. Goldman Sachs has continuously perfected GSDEEMER in practice. Short-term market pressure indicators (STMPIs) were introduced in the third version of GSDEEMER in 1999, which provided assessment of some fundamentals affecting the short-run equilibrium real exchange rate and correction of deviation between real exchange rate and long-run equilibrium exchange rate. By contrasting to empirical study, GSDEEMER is superior than PPP, both theoretically and empirically. GSDEEMER-based calculations adjust not only for the impact of inflation differentials, but also for the effect that the terms of trade, the degree of trade openness, the amount of capital inflows and other fundamentals have on the equilibrium exchange rate. Therefore, GSDEEMER empirically avoids selecting a base year (particularly difficult for emerging market) and subjectivity.In this paper, we study the middle exchange rate of CNY to USD since the CNY exchange rate reform on July 21, 2005, and calculate the long-run equilibrium exchange rate using GSDEEMER and PPP. In the meanwhile, fitting with the CNY nominal exchange rate movements under the floating exchange rate, and come to the conclusion that both GSDEEMER and PPP model can correctly expect RMB equilibrium exchange rate trends change. However, the balanced RMB exchange rate that GSDEEMER measured was less deviate from the RMB nominal exchange rate observations from July 21 2005,Exchange rate system reform, to December 31 2008. With RMB exchange rate reform continues to deepen and awareness of market-oriented process strengthening, deviation of GSDEEMER from the RMB nominal exchange rate decrease constantly, the underestimate has been improved. Empirical results show that…The conclusions are as follows: Firstly, the result of GSDEEMER is more close to historical data compared to PPP theory. Secondly, GSDEEMER can captures some particular features of China more accurately, which has a typical fast-developing exchange rate market. GSDEEMER is more suitable for empirical study of CNY equilibrium exchange rate issues. Thirdly, since the managed floating exchange rate regime was implemented in China, GDP growth is closely connected with foreign trade. CNY equilibrium exchange rate level is higher than current nominal exchange rate, so CNY still has space for appreciation theoretically.