| Under the condition of open economy, the real exchange rate, as a kind of important relative price level, plays the role of the allocation of resources in the global economy. The real exchange rate is also an important variable affecting a country’s international competitiveness and has extensive influence on a country’s economic development. So, the real exchange rate has been the important topic of the academic research. The scholars mainly study the exchange rate from three aspects by reading a widely cited survey of the literature on the real exchange rate. The first is from the angle of the factors that affect the real exchange rate, including productivity, government consumption, current account and so on. The second is to measure the equilibrium real exchange rate. The third is to research how the change of real exchange rate affects other economic variables. For example, how is the real exchange rate affect economic growth? Since1964, Balassa-Samuelson(BS) effect has caused a great deal of debate in the world and been the scholars’favorite subject among the factors that affect the real exchange rate. In1991, Froot and Rogoff postulated government spending tends to fall disproportionately on domestic non-tradable goods and services, the level of relative price of non-traded sector would rise. So the real exchange rate tends to rise with government consumption. Government consumption impact on the real exchange rate is known as the Froot-Rogoff effect. Domestic scholars have done a lot of researches on the Balassa-Samuelson effect, but done little on the Froot-Rogoff effect, some study of equilibrium exchange rate also did not join the control variables of government consumption. The paper studies whether Government consumption will effect RMB real exchange rate in China.First of all, this paper chose the1994-2012panel data of31provinces in China, to analyze the transmission mechanism of government consumption on the impact of the real exchange rate. Then, we selected the180economies around the world, using the economies and China’s relative variables on1994-2012panel data to do the research of the relative government consumption on the impact of the bilateral real exchange rate. Based on the research, we can get the following conclusions:Firstly, Chinese government consumption affects the RMB real exchange rate by influencing the relative prices of non-traded sector level; Secondly, the RMB real exchange rate tends to rise with government consumption. On the whole, an increase of the government consumption by1%is about associated with an appreciation of the RMB real exchange rate by13%; Thirdly, the RMB real exchange rate will rise in the short term.Finally, we can get the following inspirations:If the appreciation of RMB real exchange rate is based on the improvement of productivity, then the appreciation of RMB real exchange rate is normal and reasonable, which can promote the long-term economic growth; However, if the rise of RMB exchange rate is due to the unreasonable government spending, this is harmful to economic development for the long time, which is in need of improvement. Therefore, the Chinese government consumption expenditure structure should be improved. |
