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An Empirical Study on the Purchasing Power Parity of RMB

Author: KangYa
Tutor: SongDeYong
School: Huazhong University of Science and Technology
Course: Western Economics
Keywords: Exchange rate PPP Cointegration Error correction model
CLC: F832.6
Type: Master's thesis
Year: 2007
Downloads: 301
Quote: 0
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Abstract


PPP (Purchasing Power Parity) theory that the two countries' currency exchange rate depends on the purchasing power of the two currencies , namely : Determine purchasing power of money determines the price level in the long-term exchange rate between the two countries . The theories have been proposed since then, many countries in the development or reform of exchange rate regime , they both extensive reference to the theory. PPP has become a standard textbook model . However, the purchasing power parity theory is correct or not , economists varies, for and against the theory has a lot of theoretical and empirical literature . This paper first to make a purchasing power parity theory explained . We reviewed the origins of the PPP theory , the theory of purchasing power parity is given several mathematical expressions , the distinction between absolute and relative purchasing power parity theory , focused on clarifying the need to meet the established PPP assumptions and constraints , and then discusses the purchasing power parity several modified form . We analyzed the domestic and international economics literature test three main models of PPP , and the main empirical method and its results. We Renminbi against the U.S. dollar and the two countries to verify the producer price index purchasing power parity. We take an empirical model is a classic Engle-Granger cointegration and error correction model, selected in January 1997 to June 2005 monthly time series , the time span of nine years , the monthly sample size was 102. Our conclusion is : ① exchange rate, the price level of the two countries there is an order of cointegration , exchange rates and prices in the long term equilibrium relationship exists ; ② cointegration equation impact of changes in the exchange rate is significant , that the United States in the relative price level changes significantly affect the currency exchange rate changes , and therefore in the results support the purchasing power parity. But VECM results R2 is very small, which indicates the purchasing power parity in explaining exchange rate fluctuations, particularly the role of short-term fluctuations is limited. Finally, we discuss the empirical results implied policy recommendations. If the long-term purchasing power parity holds , then a country in order to obtain the actual exchange rate stability , appropriate policy mix is a floating exchange rate system and the peg inflation monetary system.

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