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Study on Renminbi’s Long-run Exchange Rate Determination Model

Author: LiuZuo
Tutor: TongGuangRong
School: Wuhan University
Course: Quantitative Economics
Keywords: RMB’s exchange rate long-term exchange rate determination model Purchase Power Parity co-integration
CLC: F830.7
Type: Master's thesis
Year: 2005
Downloads: 454
Quote: 1
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Abstract


Since the collapsing of Bretton Woods System, tremendous changes have taken place in the field of international finance. The most typical one is the extremely large and abnormal fluctuation of exchange rates, which has made global economic relationships complex and international trade, finance and investment face big risks and uncertainties. Exchange rates relate not only to the survival of the bank and enterprises, but also to the political and economic stability of nations, especially when change of exchange rates goes out of control. For instance, in the end of 1997 the breakout of Financial Crisis almost destructed some South Asian countries. Therefore, frequent change of exchange rates has attracted attention from governments, financial departments, enterprises and researchers.There are many theories on exchange rate determination, but only about recent ten years to study RMB’s exchange rate determination by making use of them. With the development and application of Econometrics, analyzing methods for exchange rate determination can be categorized into two types. One is theoretical deduction. It means that theoretical equation is deduced before real data are processed to check applicability of the theory. The other is econometric co-integration. It means that independent variables highly correlated with dependent variables are picked out before the method of co-integration is applied to determine the quantitative relation between the independent and dependent variables. Accordingly, the author selects Purchase Power Parity Theory, introducing gross domestic products (short for GDP) of China and the United States to reconstruct the long-run model of RMB’s exchange rate and checks it empirically.In the empirical research of Purchase Power Parity, Four independent variables correlated with the fluctuation of exchange rate are picked out, including GDP of China and the United States, Consumer Price Index of China and the United States, with yearly data of 1980-2001 processed, the econometric method of co-integration is applied to find the quantitative relation between the dependent variable, RMB’s exchange rate, and the four independent variables mentioned above. It turns out that RMB’s exchange rate experienced twice obvious devaluation in 1985 and 1994, and obvious overvaluation during 1988-1989, and nearly equilibrium exchange rate during 1981-1983,1986,1990-1993,1996-2000.In recent years, RMB’s nominal exchange rate deviates obviously the equilibrium exchange rate, and international shouts to revalue RMB are more and more high. In the short term, RMB’s exchange rate is not fit to revalue for the sake of consistent、 stable and health development of our economy, but in the long-term trend, RMB’s exchange rate revaluation is inevitable, therefore, it must perfect the formationmechanism of RMB’s exchange rate, more lets market to decide the RMB’s exchange rate in a proper floating range, which is helpful for our economy development to establish a harmony, stable and persistent international environment.

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