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Research on RMB Equilibrium Exchange and Adjustment of Trade Balance both Theoretically and Empirically

Author: YaoXiuFang
Tutor: ChenYan
School: Ningbo University
Course: International Trade
Keywords: RMB equilibrium exchange rate trade balance elastic theory
CLC: F832.6
Type: Master's thesis
Year: 2013
Downloads: 1
Quote: 0
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Abstract


The relationship between RMB equilibrium exchange rate and trade balance is a problem ofgreat theoretical and practical significance. This paper carries on research both on theoretical andempirical study.In theory, this paper deduces RMB equilibrium exchange rate theory model and puts forwardthe Marshall-lenard conditions of equilibrium exchange rate. First,based on the theory model itadopts related macroeconomic data, uses the ADF unit root test and the Engle-Granger twofootwork, chooses five economic variables affecting RMB equilibrium exchange rate: governmentexpenditure accounted for a proportion of GDP, trade openness, terms of trade, tax balance, theexport tax rebate. Through constructing empirical model (ERER) and error correction model(ECM), the paper estimates RMB nominal equilibrium exchange rate, as well as the unbalancedegree. Results show that there are varying degrees of the RMB exchange rate disorders. Moresevere disorders indwelled from1985to1998, relatively less occurred in1999-2011and theexchange rate is relatively close to the equilibrium exchange rate. Error correction model resultsshow that the nominal exchange rate can automatically recover toward the equilibrium exchangerate after deviating from the equilibrium level. So it is a stable equilibrium between variables. Theselected economic variables show the same direction of the effect of long-term and short-termequilibrium exchange rate of RMB, and the impact is obvious. Further more this paper relaxes theassumptions of Marshall-lenard conditions that the initial trade is balanced, modifies the elasticconditions, deduces the flexibility conditions between the RMB equilibrium exchange rate andtrade balance adjustment.Empirical results well explains the relationship between changes ofequilibrium exchange rate of RMB and trade payments adjusted.By establishing the VAR modelof RMB equilibrium exchange rate and the trade imbalances degree, this paper quantifies theimpact of RMB equilibrium exchange rate movements on the extent of the trade imbalance.Thepaper concludes that the role in regulating the trade balance of RMB equilibrium exchange rate isrelated to the initial trade balance, import and export price elasticity of demand. At last this paperputs forward suggestions on RMB equilibrium exchange rate and trade balance adjustmentaccordingly.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Exchange rate,foreign financial relations
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