Research On RMB Equilibrium Exchange Rate: 1994-2009

Since the beginning of 2002, along with long-term stability and rapid economic development, our current account surpluses and foreign exchange reserves has increased rapidly, the RMB exchange rate faces with significant upward pressure. Against the criticism of the international community, we need to know whether the RMB exchange rate is underestimated or not? If underestimated, how much the degree of underestimated is and how it impact on the economy? In order to answer this series of questions we need to measure the equilibrium real exchange rate of RMB and judge whether the RMB exchange rate is underestimated or not based on it.In order to empirically research the real exchange rate misalignment of RMB and its economic effects, this paper collects the quarterly data from 1994 to 2009 of labor productivity, terms of trade, net foreign assets and openness of our country as the long-term economic fundamentals variable which are used to estimate the level of RMB equilibrium exchange rate.Through using the behavioral equilibrium exchange rate model and cointegration analysis we found:in the long-term, the RMB equilibrium exchange rate is decided by that four factors and labor productivity and net foreign assets have a positive effect on the equilibrium exchange rate, while the term of trade and openness play a negative role in promoting the RMB real exchange rate, the main reasons of the appreciation of RMB to other foreign currencies is the rapid increase of labor productivity and the rapid growth of our net foreign assets; error correction models show that:the real exchange rate of RMB has a certain amount of self-correction mechanism by 25.56%; on this basis, through H-P filtered analysis we extract the long-term equilibrium value of the long-term economic fundamentals variable, then, we measure the misalignment level of RMB real exchange rate to the long-run equilibrium value, find that:although the real exchange rate of RMB has been undervalued, the magnitude of misalignment is not great, little more than 10%. Therefore, the current RMB exchange rate is more appropriate, and the criticism of the international community on the RMB exchange rate is totally unreasonable and without foundation.