An Empirical Study Of The Equilibrium Exchange Rate Measurement And Exchange Rate Misalignment

As one of the key indicators studying a country’s macroeconomic situation, the exchange rate not only affects the formulation of economic policies, but also have an important role in the implementation of macro-control initiatives. With the advance of economic globalization, a lot of economic phenomena impact the currency exchange rate in China together. Researching RMB equilibrium exchange rate provides a basis for our judgment on exchange rate misalignment, which is also important for further improving the foreign exchange regime, preventing risks and enhancing resilience. The increasing expectation of RMB often leads to unconventional foreign exchange settlement and arbitrage, and thus results in the rapid expansion of the scale of foreign exchange reserves. A huge amount of foreign exchange reserves effectively isolate the impact of quantitative easing monetary policy in developed countries, but the operating earnings of foreign exchange reserves is not optimistic. Therefore, the study of the real exchange rate, its misalignment and the impact on foreign exchange reserves is very necessary.In order to estimate the equilibrium exchange rate of RMB, on the basis of choosing a series of macroeconomic factors related to the real exchange rate, this paper uses the Smooth Transition Auto-regression Model to make an empirical analysis to study the nonlinear characteristics of the real exchange rate of RMB. Then use the equilibrium value of variables to estimate the equilibrium level of RMB, and construct an new index, that is the misalignment degree of real exchange rate. The results show that throughout the sample period, the undervaluation of the exchange rate appears three times, while overestimating appears twice. By exchange rate misalignment time, the undervaluation of the exchange rate lasts a long time, while overestimating just for a very short time. By the magnitude of the exchange rate misalignment, the average misalignment of overvalued or undervalued real exchange rate remained at about two percent to six percent, which is very close to equilibrium level.Based on State-space Model with variable coefficients, the paper also makes an empirical research on the impact of exchange rates on foreign exchange reserves. The results show that there are two key changes occurring on the path of the impact of variables investigated on foreign exchange reserves. The increase of real effective exchange rate index has a negative effect on the foreign exchange reserves, while the improve of GDP and real exchange rate misalignment degree both have a positive effect on the foreign exchange reserves.At the end of this paper, a series of measures are provided to keep the RMB real exchange rate equilibrium and control the foreign exchange reserves.