The Study On The Balance Of Foreign Exchange Rate Based On ERER Model

Since the Asian financial crisis in1997, with the increasing growth of China’seconomy, people all over the world pay more and more attention to RMB exchange rate.At the time being, the international community exerts great pressure on China’s RMBexchange rate regime which is pegged to the dollar in real terms, and there is questionon whether RMB exchange is on the reasonable level. Especially China is busy inimplementing its “twelfth five" national economic and social development plan atpresent, in advocating changing the mode of economic growth, and in adjustingeconomic development mechanism. So RMB equilibrium exchange rate is the focus ofour concern. Domestic and foreign scholars have expressed their own views on thisissue. However, they have not reached the same conclusion. Whether the RMB is onthe equilibrium exchange rate or not? Which factors have contributed to thedisequilibrium exchange rate of RMB? What kind of exchange rate do we have to need?Under this context the author has conducted this paper.On the basis of the theory of the equilibrium exchange rate on developingcountries, the author has selected ERER model for the equilibrium exchange rate ofRMB which is suited for the developing countries. Relevant data between the years1994to2010and reasonable explanatory variables which is related to the actualsituation in our country have been collected and calculated. With the help of this model,the author has measured the equilibrium exchange rate of RMB and the actual degreeof deviation. Through empirical analysis, the author has found that the dual economicstructure (GAI), government spending GDP (GFDP), trade conditions (TOT), tradeopenness (OPEN), the money supply changes (M) are the important factors thataffect exchange rate misalignment. At last, reasonable policy recommendations onRMB exchange rate for the system reform has been given and the summary of thispaper is selected as well.