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RMB equilibrium exchange rate and exchange rate changes impact study

Author: ChenWenJin
Tutor: ZhangJianPing
School: University of Foreign Trade and Economic
Course: Business Administration
Keywords: RMB Equilibrium Exchange Rate Changes in foreign exchange rates Impact study The appreciation of the RMB exchange rate Real effective exchange rate Price Index RMB appreciation Underlying variables Inflow of foreign capital China's economic development
CLC: F830.7
Type: Master's thesis
Year: 2003
Downloads: 348
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Recently, whether the Chinese RMB was underestimated and thus needed an appreciation is a very hot topic among China and some other countries. This paper intends to make an empirical study on the RMB’s exchange rate during the period from the first quarter of 1994 to the third quarter of 2002 based on Statistics Approach, mainly on the estimation of equilibrium real exchange rate (ERER) of RMB in order to justify the effectiveness of the real exchange rate and on the assessment of the impact of appreciation on China’s economy.The empirical study show that there does exist a cointegration relationship between the REER and the selected two fundamentals comprising Difference of CPIs(DFCPI) and US Dollar Index(USDI). The R squared value of the model is 0.93. We also computed that during the studied period, the RMB has appreciated for 33 percent, among which, 36 percent was caused by the expansion of the DFCPI, and the rest 64 percent owing to the increase in value of US Dollar.The coefficient of ECM, -0.56 also demonstrates a good self-adjustment mechanism of RMB. Using the estimated equation and the permanent value of the two fundamentals derived with H-P Filter method, we calculate the equilibrium real exchange rate of RMB, through which we further figure out the deviation of the REER in each term. Finally we got four important conclusions: First, during the studied period, the deviation of REER is limited in the normal fluctuation extent (i.e., that is small than 10 percent) except the last quarter of 1997 exceeding 12.8 percent of the ERER. Second, once the deviation occurred, the REER will move back to the ERER within eight quarters.Third, the current REER of RMB is reasonable and acceptable on the fact that only a 4.6 percent lower than the ERER in the latest term (i.e., that is the third quarter of 2002). Last, as the ERER remained stable since 2000, it is hard to say that the RMB continually appreciated in recent years.Following with the empirical study of ERER, We step forward to discuss the impact of supposed appreciation on China’s economy: An appreciation of RMB will reduce the export, stimulate the import, lower the FDI and speed up the unilateral transfer, all of which will make China’s current account and capital account double-drop and bring deficit to its Balance of International Payments. Moreover, under current situation of staggering price and domestic absorption, the declining both in net export and FDI could aggravate China’s deflation and slow down its GDP growth rate.To further illustrate this point, we take the export as an example to make an empirical study and made a simulation to measure the drop extent of export assumed that RMB appreciates 10 percent in the third quarter of 2002. From the established export function, we obtained the REER elasticity of export, -0.94, which means that appreciation would cause significantly negative effect on China’s export as well as the whole economy, so it should be carefully treated

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CLC: > Economic > Fiscal, monetary > Finance, banking > Finance, banking theory > Exchange
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