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RMB Undervaluation and the Internal-external Equilibrium of Economy

Author: WangChunWei
Tutor: ZouHongYuan
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: Macroeconomic balance method Medium-term equilibrium Exchange rate Internal and external balance
CLC: F832.6
Type: Master's thesis
Year: 2008
Downloads: 23
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Abstract

July 21, 2005, the People's Bank of China announced that the RMB appreciation, and commitment to change the direction of the RMB exchange rate regime will be more floating. Since then, gone through a process of continuous appreciation of the RMB exchange rate. On the basis of the field of view of the macroeconomic balance framework, whether this round of appreciation of the exchange rate to adjust to the medium-term equilibrium level in line with China's economic base variable? In this paper, the calculation method suitable for China, and strive to answer this question, and in the calculation of currency , analysis of China's economic internal and external balance. The method, the paper mainly domestic rarely used Isard and Faruqee (1998,2001) developed macroeconomic balance approach to determination of the RMB exchange rate. It should be noted that the IMF economists believe that even in so-called exchange rate determined under the method of deviation from the medium-term equilibrium level, and do not necessarily reflect the exchange rate mismatch (misalignment) If there is deviation may also be due to the macro- The policy of economic cyclical factors or inappropriate result. Therefore, this method estimates the exchange rate, not just a simple measure of the exchange rate is to achieve the medium-term equilibrium level, but more importantly, provide a reference system for evaluation of China's macroeconomic volatility, government's economic policy and China's economic development model. The article is divided into four parts. Analysis in the first part of the exchange rate system in 1994, the unification of the RMB exchange rate arrangements, outlined the development of China's current status in the past 12 years, especially in recent years, the rapid growth of China's current account balance, and a brief introduction of the international and domestic politics and academia's response thereto. Next article from the definition of the equilibrium exchange rate, a brief review of the historical development of the macroeconomic equilibrium framework and the use of this method in the current international status of research on the value of the Renminbi. The second chapter introduces the theoretical framework of the macroeconomic balance approach: First, the definition of the international balance of payments: 1. Target capital account balance equal to the basis of the current account balance, when there is no change on the performance of international reserves; 2. Basis of The current account balance is equal to a sustainable domestic savings - investment balance. On this basis, we describe the basic ideas of the macroeconomic balance approach, that is, if it is determined that a sustainable domestic savings - investment relationship, assume that the other factors that affect net exports at the same time under control or remains unchanged, then we will be able to determine the equilibrium real exchange rate, the exchange rate in the internal balance (full employment) to reach these two aspects of the project often consistent. Derived the classical model, and added a more complex factors to derive the interim model. Here to study the impact across time savings behavior variables and their impact mechanism, equilibrium asset flows and stocks. We think: 1. Savings behavior not only by interest rates, output current value, and is also influenced by the hysteresis value; 2. Different assumptions of fiscal policy, the substantive impact of savings; 3 from a medium-term perspective, we are more Emphasizes that the traffic balancing. Third, the basic idea under the guidance of the IMF's macroeconomic balance method, the three steps of the method to calculate the equilibrium exchange rate. The three steps are: 1. Determine the basis of the current account balance; 2. Estimated that a country's sustainable savings - investment balances; based on calculated elastic combination of steps one and two can estimate a country's The medium-term equilibrium real exchange rate. Chapter in accordance with the method described above, respectively, measured the elastic relationship between 2005, the basis of current account balance, the goal of capital account balance, and current-account balance and the real effective exchange rate. Finally, we come to underestimate the value of the RMB exchange rate. Estimates underlying current account balance, respectively, Wang (2004) and Goldstein (2004) estimated that for China the basis of the current account balance. Wang (2004) method is the simple average method, while Goldstein (2004) focused on the derivation of the basis of the current account balance according to the macroeconomic situation. Goldstein (2004), based on the economic growth rate of adjusted total sustainable GDP; annual geometric average growth rate based on 1999-2004 imports derived potential amount of imports; based on the export of 1999-2004 year geometric average growth rate is derived potential export amount, and then based on these results deduced 2005, the basis of the current account balance to GDP ratio of 3.33%. Finally, the results of the two methods were compared and trade-offs, and concluded that Goldstein (2004), based on the macroeconomic situation in the method of adjusting the data is more accurate, so the use of the results of the method of calculation, or 3.33%. In the calculation of the target capital account balance using the three methods, an average net capital inflows in 1999-2002 as the target capital project balances; The second method is to use the average balance of foreign direct investment in recent years as target capital account balance or sustainable savings - investment balance; A third approach is to estimate the net foreign assets to GDP ratio to stabilize the current account balance in 2001 as a the target capital project balances alternative. Finally, the calculation results are compared, taking the median of three values ??in the target capital project balances that the 2005 target capital account balance to GDP ratio of 1.66%. A simplified Three model used in the calculation of the current account balance and the real effective exchange rate flexibility relationship to derive this relationship, and finally get the flexibility of the RMB current account balance and the real effective exchange rate relationship is imported elastic export elasticity, trade openness, exports and imports, the ratio of the four parameters. Derive the import elasticity, the calculation of trade openness, export and import ratio, as well as modeling on the basis of the export elasticity, for every 1% change in real effective exchange rate is necessary to change to 1.26% in the current account balance. The final comprehensive three-step process, the real effective exchange rate of the RMB in 2005 was 6.29% undervalued conclusion. On the basis of this calculation results, the last chapter analyzes the internal and external imbalances in the Chinese economy, leads to an important factor in growth mode, the internal and external imbalances, and the policy recommendations of the economic growth mode transformation to a consumer-driven mode. This chapter first external imbalances of China's economic performance is continuous, long-term, substantial balance of payments surplus, although the positive effect that the increase in foreign exchange reserves, but its negative effects also must pay attention to, such as: First, the total domestic The supply and demand balance is broken, often continued high trade surplus means exports than imports, in a way, for China's productivity is not high, the technological content of export products is relatively high transition economies this case on behalf of the over-exploitation of domestic resources. Continued large surplus means that the increase in the supply of foreign exchange of RMB appreciation pressure; addition, due to the arrangement of China's foreign exchange management system, large foreign exchange reserves will make the central bank foreign exchange increased formation of inflationary pressures. From another point of view, the foreign exchange reserves of low-income and even negative returns, the formation of the IMF's definition of \Continued international balance of payments surplus will lead to international friction and China's foreign economic activities, also in the case of trade disputes and friction loss. Second, based on analysis of external imbalances, the paper discussed the internal balance and external balance relations and internal imbalances are the key factors that result in external imbalances. In this paper, such judgments continue to discuss China's continued economic growth mode is considered investment-driven. In recent years, net exports are also increasingly become a driving factor, precisely because these two pull factors dominated, leading to over-investment. In excessive investment behind the high savings. The savings rate in China since the reform and opening up all the way up to GDP ratio has reached 48.1% in 2005. High savings rate, coupled with low interest rates, stimulate investment impulses; due to the high savings rate, corresponding to low domestic consumption, investment outputs a large number of products in the domestic market can not afford to have to look for international sales, the formation of the high growth of exports, also because of weak growth of domestic consumption, import growth will be restricted, thus resulting in net exports rising. Therefore, the the savings problems is the key to China's economic imbalances. Analysis of savings from the three aspects of a country's savings: household savings, corporate savings and public savings analysis. Think: 1. Household savings by the population structure and social welfare, high household savings in China is mainly due to the imperfections of the social security system, leading to guard against the tendency of growth of future spending. One of the reasons of high savings and high investment is a capital-intensive industrial high proportion in the national economy. Another reason is that the long-term Chinese companies even do not pay, especially state-owned enterprises to pay lower dividends. The third reason is that the profitability of the business and the amount of profits in the past 10 years a steady increase in the income growth in the case of low-dividend, retained earnings natural increase, the previously mentioned low interest rates further to stimulate business investment. Government savings is determined by the emphasis on investment growth mode. Judgment in such a high savings causes concern turned to consumer-driven economic growth in China in five aspects: First, cut personal income tax; increase government spending; Third, is to promote the growth of household consumption; Fourth adopt a more flexible exchange rate regime; Fifth, the adjustment of the corporate income tax policy and state-owned enterprises bonus policy. Although the government made policy adjustments in these areas more or less, but in 2005, consumer spending and GDP, is still declining, which means that we are still facing tough economic transformation of the way.

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