Measurement Of RMB Equilibrium Exchange Rate

In any exchange rate regime, whether the exchange rate is in an equilibrium range plays an important role in allocating resources efficiently and keeping stable economic growth for a country. Determining the equilibrium exchange rate and the exchange rate misalignment are the basis for making exchange rate policy and adjusting exchange rate level. Moreover, it’s also an important basis for the international coordination of economic policy. In the context of economic globalization, the determination of exchange rate also involves international political and economic games. Along with the gradual improvement of our position in the world economy, reasonably determining the RMB equilibrium exchange rate not only has great significance for China to strive for a favorable international environment, but also has important significance to the development of world economy.In this paper, after introducing the equilibrium exchange rate theory systematically, we choose the most representative four methods to calculate the RMB equilibrium exchange rate. Then we compare the results of different methods to determine the reasonable level of the RMB exchange rate.We use PPP, BEER, ERER and FEER method to calculate the RMB equilibrium exchange rate and exchange rate misalignments. Though there are some differences between the results of four methods, they are consistent with the judgment about the level of RMB equilibrium exchange rate and the RMB exchange rate misalignments. Furthermore, the results of the BEER, ERER and FEER method are more similar, the results of these methods all show that the movements of RMB real effective exchange rate and equilibrium exchange rate are coincident approximately in the observation period, and both of them present a small fluctuation with a general uptrend. In the measurement of the RMB exchange rate misalignments, the results of these four methods all show that there is always a deviation between the RMB real effective exchange rate and the RMB equilibrium exchange rate, and the deviation differs from year to year.According to comprehensive analysis, we suggest that there is always a deviation between the RMB real effective exchange rate and the RMB equilibrium exchange rate, and the deviation differs from year to year. However, the RMB exchange rate does not appear "consistently underestimated" as some western scholars claimed and the level of undervaluation is not as high as they expected. In terms of the current exchange rate, we consider that the RMB real effective exchange rate has been in a reasonable range and does not require a sharp appreciation or depreciation.The main innovation of this paper lies in using four methods to estimate the RMB equilibrium exchange rate and using ADF unit root test, VAR, nonstationary time series co-integration test, H-P filter and other advanced econometric methods to the latest sample data for empirical analysis. In addition, through the comparative study of different methods, we can reveal the theoretical limitations and practical implications of the equilibrium exchange rate based on different methods, which provides some enlightenment for us to accept the theoretical conclusions critically.Estimating the equilibrium exchange rate of RMB is a huge and complex project, subject to the knowledge structure, research ability and the availability of data, there will inevitably be some limitations in this paper. However, we still attempt to focus on innovative research and try to obtaine some meaningful conclusions.