Download Empirical Research on RMB Equilibrium Exchange Rate

Empirical Research on RMB Equilibrium Exchange Rate
Zhao xijun
Sunbin
School of Finance Renmin university of China,
Beijing, PR.China, 100872
Abstract: In recent years, China’s economy experiences a rapid growth. A strong economy creates a
strong currency. Based on the analysis of some economic indicators, many economists and policy
makers argue that RMB is undervalued, and a heated debate on whether RMB should appreciate rises in
the world. This paper uses some econometrics techniques including cointegration analysis and
Hodrick-Prescott (H-P) filter approach to develop a model for RMB equilibrium real exchange rate.
Using this model, we can assess RMB exchange rate and analyze its misalignment from an academic
perspective.
Keywords: RMB, Real effective exchange rate, Equilibrium real exchange rate, Cointegration, H-P
filter, Misalignment
1. Introduction
China’s economy has experienced a rapid growth since the adoption of reform and open policy.
Economic reform and development accompany the reform of China’s exchange regime. Before 1994,
China’s dual exchange rate system allowed a market rate in the swap centers and an official rate to exist
simultaneously. On January 1st 1994, the dual exchange rate system was abolished, and the official rate
(5.8 RMB/USD) was devaluate about 50% and unified with the market rate (8.7 RMB/USD). From that
time, China implements a single and managed floating exchange rate regime based on market supply
and demand. In practice, this regime is a tightly managed floating system. RMB pegs to the U.S dollar at
8.2800 RMB/USD, and the fluctuation is allowed within a 0.3% band. The People’s Bank of China
(PBC) is committed to intervene foreign exchange market in order to make exchange rate stable.
Extremely, some people argue that China’s exchange regime is a fixed exchange rate system essentially.
In recent years, the reform of China’s exchange regime has been at the center of policy debates in
the world, and the trend of RMB exchange rate is the focus of many economists and policy makers.
Because in fact the formation mechanism of RMB exchange rate lacks market force, there are many
discussions on whether the RMB is evaluated accurately. When the Asia financial crises occurred in
1997, many people expected RMB to depreciate. But in recent 2 years, based on the analysis of some
economic indicators, such as the growth rate of GDP, the net export, the foreign direct investment (FDI),
and the foreign exchange reserve, the question about whether the RMB should appreciate is debated
intensively in the world.
Many scholars have developed the equilibrium real exchange rate theories. And there are
extensive literatures on the issue about the assessment of RMB and its misalignment, such as Yu (1998),
Zhang (2000), Pu and Tyers (2001) and so on. Based on the development of equilibrium exchange rate
theories, this paper studies RMB by analyze RMB equilibrium real exchange rate, and use real effective
exchange rate as its best proxy.
This paper develops a model for RMB equilibrium real exchange rate using cointegration analysis.
This cointegration equation can capture a steady-state and long-term relationship between the
equilibrium real exchange rate and its five fundamentals—including: the ratio of M2 to GDP, the ratio of
foreign reserve to GDP, the ratio of government expenditure to GDP, terms of trade, and openness.
Based on this equation, using the series of five fundamentals smoothed by the H-P filter, we can
estimate the RMB equilibrium real exchange rate, and assess the misalignment of RMB.
The rest of this paper is organized as follows: The next section reviews some literatures on
assessment of RMB exchange rate and its misalignment; section
provides a brief introduction to
conceptions on real exchange rate and equilibrium exchange rate; section
does an empirical research
on RMB equilibrium real exchange rate using cointegration analysis; section
estimates RMB
Ⅲ
Ⅳ
Ⅴ
Ⅳ,then compares RMB equilibrium real exchange rate with real effective exchange rate to analyze the
equilibrium real exchange rate using the H-P filter technique and the model developed in the section
misalignment of RMB exchange rate and find whether RMB should be revalued upward in recent years;
the last section gives a brief conclusion about this paper.
2. Review of literatures on assessment of RMB exchange rate and its
misalignment
Assessment of a currency exchange rate and the degree of its misalignment is always one of the
most challenging topics in the field of macroeconomics. Many scholars have developed the equilibrium
real exchange rate theories.
Many domestic scholars used different approaches to analyze the RMB equilibrium exchange rate,
focused on the assessment of RMB exchange rate and its misalignment.
Yu (1998) defined the real exchange rate as the ratio of the RMB price of foreign goods to the
price of domestic goods. He found that the RMB exchange rate is overvalued about 30% after 1993.
Zhang (1999) established an analytic framework of RMB equilibrium exchange rate based on the
quarterly data from 1984 to 1999. He used terms of trade, productivity, broad money supply (M2),
foreign net asset, and RMB interest rate as explanatory variables of the equilibrium exchange rate.
Comparing the real exchange rate with the equilibrium level, he found that RMB exchange rate was
overvalued significantly in two periods from 1984 to 1985 and from 1989 to 1990, and was undervalued
significantly from 1987 to 1988. Other time the real exchange rate fluctuates within a small range
around the equilibrium level.
In Zhang’s another paper (Zhang, 2000), based on the annual data from 1978 to 1999, he used the
equilibrium real exchange rate (ERER) model and behavioral equilibrium exchange rate (BEER) model
to assess the RMB exchange rate and analyze its misalignment. He thinks that compared with nominal
exchange rate, RMB real effective exchange rate can reflect China’s international competitive more
objectively and fully, and is close to the concept of “equilibrium exchange rate”. He found that RMB
was overvalued significantly in two periods from 1983 to 1995 and from 1997 to 1998, while it was
overvalued slightly in 1996. He also found that RMB was undervalued twice—from 1987 to 1988 and
from 1991 to 1995. Meanwhile he found the RMB exchange rate was closer to the equilibrium level
from 1999 to 2000.
Ma (2000) used the relative price level and the trade volume of China’s trade partners to calculate
RMB real effective exchange rate. Using single equation model for evaluating real exchange rate
misalignment by Edwards, he developed a model for RMR equilibrium exchange rate. In his model, the
independent variables are the level of domestic credit, government expense, terms of trade, net export,
and the spread of foreign and domestic interest; dependent variable is RMB real effective exchange rate.
The predicted value was the equilibrium exchange rate. Based on the result of the regression, he thought
that RMB was overvalued from 1995.
Pu and Tyers (2001) used the approach of the Devarajan-Lewis-Robinson general equilibrium to
analyze the time path of the RMB real effective exchange rate before and during the Asia financial crises.
They found that since 1997 Asia financial crises happened, RMB real exchange rate is lower than the
equilibrium level.
Anderson (2003) estimated partial equilibrium model centered on trade equations and found that
the RMB is undervalued at present.
From the review of the literatures on assessment of RMB exchange rate and its misalignment, we
can find many useful things. First, most analysts are focused on the RMB real exchange rate, and try to
find whether RMB real exchange rate is in equilibrium, that is, whether it is facing a misalignment. In
these studies, the popular approach is to use real effective exchange rate (REER) as a proxy of real
exchange rate to study RMB equilibrium real exchange rate. Second, most studies rely on the
cointegration techniques. Third, these studies use a wide variety of variables as regressors to interpret
the RMB equilibrium real exchange rate. However, most of them use terms of trade, government
expenditure as regressors.
3. Conceptions on real exchange rate and equilibrium real exchange rate
Based on whether adjusted by inflation, we can divide the exchanges rate into nominal exchange
rate and real exchange rate. Nominal exchange rate is the exchange rate that is not eliminated the factors
of inflation. Real exchange rate is the one that is adjusted by inflation, and reflects the purchasing power
of the currency. Most studies show that real exchange rate can reflect the competitiveness of domestic
goods and the development of economy better than the nominal exchange rate.
There are many approaches to calculate real exchange rate.
First, adjusted by the price index. Denote REPRICE.
RERPRICE=ER×P*/P
Where REPRICE is real exchange rate; ER is nominal exchange rate defined as units of domestic
currency per unit of foreign currency; P* is foreign price index; P is domestic price index. We usually
choose the Consumer Price Index (CPI) or the GDP deflator index as the price index.
Second, adjusted by the relative price of tradable to nontradable goods, or the Salter ratio (Corden,
1994). Denote RER.
RER=ER×
PT
PN
Where RER is real exchange rate, PT and PN are the world price of tradable goods and the price of
domestic nontradable goods respectively. In some studies this formula is replaced by the following
formula:
WPI *
RER=ER×
CPI
Where WPI* as a proxy for PT is the foreign Wholesale Price Index which is usually calculated by
US data; CPI as a proxy for PN is domestic Consumer Price Index, sometimes it is replaced by Retail
Price Index (RPI).
Third, the real exchange rate is defined as the real effective exchange rate (REER).
The real exchange rate calculated by the first two approaches is a bilateral exchange rate. It has an
obvious flaw that it can’t reflect the trend of one current against all other currencies. In order to measure
average change of one currency against other currencies, IMF introduces a comprehensive exchange rate
index—real effective exchange rate. The real effective exchange rate of currency of country i is defined
as follows:
wij
REERi=∏j≠I (P iR i /P j R j)
Where j is one of the major trade partners of country i, Pi and Pj are the consumer price indexs of
country i and country j respectively; R i and R j are the nominal exchange rates of country i and country
j respectively; Wij is the weight of competitiveness of country j. Now, most members of IMF publish
this index. RMB real effective exchange rate published by IMF includes 16 trade partners, including
Hong Kong, Japan, Taiwan, Korea, Singapore, USA, Canada, Germany, France, Italy, British,
Netherlands, Belgium, Swiss, Spain, and Australia. Its base period is year 1990. Figure 1 shows the
trend of RMB real effective exchange rate from 1980 to 2002 published by IMF. A decline in this rate
indicates the depreciation of RMB, while an increase indicates that RMB appreciates.
Figure.1 the trend of RMB real effective exchange rate from 1980 to 2002
source: IMF
The equilibrium real exchange rate (ERER) is a concept of general equilibrium, and is defined
traditionally as the rate that is consistent with the simultaneous attainment of internal and external
equilibrium. It can make the foreign exchange market clear. It is determined by the fundamental factors
of economy, and is not affected by the exchange policy. The factors that affect a country’s internal and
external equilibrium will also affect the equilibrium exchange rate. We call these factors as the
“fundamentals” of the equilibrium real exchange rate.
Many economists is devoted to study RMB equilibrium real exchange rate. Most of them think
that it is not meaningful to study the nominal exchange rate, and the real exchange rate can reflect the
value of RMB better. Because the equilibrium real exchange rate is not an observable variable, we have
to using a variable to replace it, Through analyzing this rate, we can judge whether RMB exchange rate
is in equilibrium and whether there is a misalignment. As argued in the preceding section, the real
effective exchange rate is a good proxy of equilibrium real exchange rate. In the next section, we also
deal with RMB real equilibrium exchange rate using this popular approach.
4. Empirical research on RMB equilibrium real exchange rate
Many scholars studied the equilibrium real exchange rate for developing countries, and found that
the major factors affecting equilibrium real exchange rate include terms of trade, interest rate spread,
openness, long run capital inflow, tariffs, the ratio of M2 to GDP, government expenditures, productivity,
investment ratio, domestic credit, capital controls and so on. Because these variables are time series or
have trend of time, we can’t simply use ordinary least square (OLS) to regress the real effective
exchange rate against these variables. In this paper, we use Engle-Granger two-steps tests to do a
cointegration analysis on the real effective exchange rate and these fundamentals.
The concept of cointegration is introduced by Engle and Granger in 1980s. This method is
developed by many scholars from 1990s, and is used widely in the econometrics analysis. Based on the
development of cointegration analysis techniques, equilibrium real exchange rate theories are improved,
and the relationship between the real exchange rate and its fundamentals can be tested directly. The
cointegration equation can be used to estimate the equilibrium real exchange rate and to find its
misalignment. Most literatures use this approach to study the behavior of real exchange rate.
Considering the characters of China’s economy and exchange rate regime, following the studies on
RMB exchange rate in recent years, this paper chooses some fundamentals to test and finds that there
are five variables that are cointegrated with RMB real effective exchange rate: the ratio of M2 to GDP,
the ratio of foreign reserve to GDP, the ratio of government expenditure to GDP, terms of trade, and
openness. The terms of trade (TOT) are defined as the ratio of the index of export price to the index of
import price, and it comes from World Bank annual report. The openness is defined as the ratio of the
volume of import and export to GDP, and it is calculated by the data from <China Statistical Yearbook>.
The real effective exchange rate comes from IMF annual report. The ratio of M2 to GDP, the ratio of
foreign reserve to GDP, and the ratio of government expenditure to GDP are all calculated by the data
from <China Statistical Yearbook>.
Taking the logarithms of these five variables, we denote them as LM2, LRESERV, LGOV, LTOT,
and LOPEN respectively. Take the logarithm of RMB real effective exchange rate and denote it as
LREER. Collect the annual data of these six variables from 1984 to 2002 and use ADF (Augmented
Dickey—Fuller) approach to do the unit root tests. The result of the test is represented in Table 1. The
result indicates that the data are all the stationary series of 1st difference at the significant level of 1% or
5%. So we can do the cointegration analysis between the real effective exchange rate and these five
variables.
Table1. Unit root test by ADF test
Test specification C,t,* 1
Variables
ADF Statistics
Critical Valus2
（ ）
LREER
(C, 0, 1)
-1.136044
-3.0521*
∆LREER
(0, 0, 1)
-2.811115
-2.7275**
LM2
(C, 0, 1)
-1.633216
-3.0521*
∆LM2
(C, 0, 1)
-4.148508
-3.9228**
LRESERVE
(C, 0, 1)
-0.718698
-3.0521*
∆LRESERVE
(C, 0, 1)
-3.886076
-1.863898
-3.0659**
∆LGOV
（C, 0, 1）
（0, 0, 1）
LTOT
(0, 0, 1)
-1.169814
∆LTOT
(C, 0, 1)
-4.395822
-1.9627*
-3.9228**
LOPEN
(C, 0, 1)
-0.589097
-3.0521*
(C, 0, 1)
-3.082564
-3.0659*
LGOV
∆LOPEN
-1.981404
-3.0521*
-1.9642**
We can establish a RMB equilibrium real exchange rate model:
LREER=C+a×LM2+b×LRESERVE +c×LTOT +d×LOPEN+e×LGOV+ε (1)
Where C is the constant term, a, b, c, d, and e are coefficients of the corresponding variables, εis
the error term.
As defined previously, the terms of trade (TOT) are the ratio of the index of export price to the
index of import price. Change in the terms of trade has important effects on the equilibrium real
exchange rate. The existing empirical evidence suggests that deteriorations of terms of trade usually lead
to a depreciation of equilibrium real exchange rate, and improvement of terms of trade lead to an
appreciation. So the terms of trade have a positive effect on the equilibrium real exchanger rate.
Government consumption usually expenses on nontradable goods. So the increasing in
government expenditure usually provokes excess demand pressures in the market of the nontadable
goods, and will result in a higher relative price of nontadable goods and an appreciation of domestic
currency. The relationship between the ratio of government expenditure and GDP on equilibrium real
exchange rate is positive, that is, the increasing in this ratio causes an increasing in REER.
The level of foreign reserve has a positive effect on the equilibrium real exchange rate. China is
1
2
，
C and t denote the constant term and trend respectively in the ADF test star (*) denote the order of lag.
** or * denote the critical value obtained at significant level of 1% or 5%.
adopting a tightly managed floating system that RMB pegged to USD. Under this regime, the level of
foreign reserve can reflect the demand of foreign currencies. The increasing of foreign reserve
sometimes indicates that the supply of foreign currencies (USD) excess the demand, and that there is an
appreciation press on domestic currency (RMB). So, we think that the increasing in the ratio of foreign
reserve to GDP leads to an equilibrium real exchange rate appreciation.
Openness has a negative effect on the equilibrium real exchange rate. Liberalization of trade leads
to depreciation. The ratio of M2 to GDP has a negative effect on the equilibrium real exchange rate.
Use Engle-Granger two-steps tests to do a cointegration analysis on the real effective exchange
rate and these five variables.
Step 1, do a regression on the equation (1) based on the data collected. The result of the regression
is represented in the table 2.
Table.2 The result of regression on equation (1)
Dependent Variable: LREER
Method: Least Squares
Sample: 1984 2002
Included observations: 19
Variable
Coefficient Std. Error
t-Statistic
Prob.
C
1.129351
2.498625
0.451989
0.6587
LRESERVE
0.191820
0.058398
3.284692
0.0059
LTOT
1.114955
0.504450
2.210237
0.0456
LOPEN
-0.235441
0.103962
-2.264678
0.0413
LGOV
0.864839
0.090499
9.556361
0.0000
LM2
-0.842598
0.265047
-3.179054
0.0073
R-squared
0.977366
Mean dependent var
4.586583
Adjusted R-squared
0.968661
S.D. dependent var
0.301342
S.E. of regression
0.053346
Akaike info criterion
-2.771937
Sum squared resid
0.036996
Schwarz criterion
-2.473693
Log likelihood
32.33340
F-statistic
112.2722
Durbin-Watson stat
2.162945
Prob(F-statistic)
0.000000
Table 2 shows that the coefficients of the five independent variables are all significant at the
significant level of 5%. But the constant term is insignificant extremely. So we delete the constant term
(C) to establish a new equation
LREER=a×LM2+b×LRESERVE +c×LTOT +d×LOPEN+e×LGOV+ε (2)
Do regression on equation (2) based on the given data. We can obtain the result showed in the
Table 3.
Table.3 The result of regression on equation (2)
Dependent Variable: LREER
Method: Least Squares
Sample: 1984 2002
Included observations: 19
Variable
Coefficient Std. Error
t-Statistic
Prob.
LTOT
1.319035
0.053695
24.56554
0.0000
LRESERVE
0.172024
0.033207
5.180269
0.0001
LOPEN
-0.249100
0.099062
-2.514595
0.0248
LGOV
0.809248
0.083146
9.732889
0.0000
LM2
-0.781673
0.160583
-4.867730
0.0002
R-squared
0.977203
Mean dependent var
4.586583
Adjusted R-squared
0.970690
S.D. dependent var
0.301342
S.E. of regression
0.051591
Akaike info criterion
-2.870021
Sum squared resid
Log likelihood
0.037262
32.26520
Schwarz criterion
Durbin-Watson stat
-2.621485
2.113908
From table 3, we can know that the coefficients of the five variables are all significant at the
significant level of 5%. The adjusted R-squared is 0.971.
Step 2, use ADF approach to do the unit root tests on the error term of equation (2). The result by
the Eviews 3.1 shows that the ADF statistics is –3.839 and the critical value at significant level of 5% is
–3.0521. This result indicates that the error term is a stationary series. So we can say that there is a
cointegration relationship between the dependent variable—LREER and five independent
variables—LRESERVE, LM2, LTOT, LOPEN, and LGOV.
The cointegration equation is:
LREER= 0.172×LRESERVE +1.319×LTOT
0.782×LM2
0.249×LOPEN+0.809×LGOV
(3)
Because the increasing in LREER means there is an appreciation of RMB, the coefficients of the
five independent variables have the consistent sign as the theory expects: the improvement of terms of
trade, the increasing in the ratio of government expenditure to GDP, the increasing in the ratio of foreign
reserve to GDP, the decreasing in the ratio of M2 to GDP, or the decreasing in the degree of openness
leads to an appreciation of RMB equilibrium real exchange rate. The coefficients of the dependent
variables in the equation (3) tell us the elasticity of the corresponding fundamental to RMB equilibrium
real exchange rate.
－
－
5. The analysis on the misalignment of RMB
The cointegration equation captures a steady-state and long-term relationship between the
equilibrium real exchange rate and its fundamentals. We can use the cointegration equation estimated
above to generate the series of equilibrium real exchange rate.
In order to estimate the equilibrium real exchange rate, we have to get the long-run trend of the five
fundamentals first. This paper uses H-P filter technique to estimate the long-run trend of the series of
five independent variables. After obtaining the smoothed series of the five variables, we can use
equation (3) to estimate equilibrium real exchange rate.
Table 4 gives the result. Figure 2 contains the evolution of the real effective exchange rate (REER)
and the equilibrium real exchange rate (ERER).
Table.4 The estimated equilibrium real exchange rate (ERER) from 1984 to 2002
YEAR
REER
ERER
1984
218.41
181.201
1985
185.35
160.731
1986
135.03
137.2439
1987
117.1
123.8574
1988
97.29
114.2783
1989
112.39
102.7334
1990
100
94.94342
1991
88.02
87.89864
1992
78.43
83.19989
1993
68.44
80.11803
1994
72.83
81.31393
1995
79.54
80.96734
1996
85.53
81.09748
1997
89.4
81.60749
1998
89.35
81.63839
1999
85.11
81.87442
2000
84.55
84.15514
2001
2002
88.9
83.9
88.09138
89.9989
240
200
160
120
80
40
84
86
88
90
92
94
ERER
96
98
00
02
REER
Figure.2 The evolution of REER and ERER from 1984 to 2002
As we can see from the figure, from 1984 to 2002 the REER exhibited short or even medium
departures from the ERER, and the deviations are not very large. We call these departures as real
exchanger rate misalignment. When the REER is below ERER there is a undervaluation; when the
REER exceeds the ERER there is an overvaluation. The misalignment arises when there are changes in
fundamentals that lead to a change in ERER, but there is not a corresponding change in REER, or when
economic policies are not compatible with attainment of internal and external equilibrium.
We define the misalignment of RMB as U= REER-ERER ÷ERER×100%. Figure 3 gives the
misalignment of RMB, the curve above the zero line represents that RMB is overvalued, and there is a
depreciation pressure on RMB; otherwise, RMB is undervalued, and there is an appreciation pressure of
RMB.
（
）
30
20
10
0
-10
-20
84
86
88
90
92
94
96
98
00
02
U
Figure.4 The misalignment of RMB exchange rate
The pattern of the misalignment calculated by this model conforms to the historical analysis.
From 1986 to 1988, RMB exchange rate was undervalued. Especially from 1985 the exchange rate
is devalued sharply. The main reason for this period was that the official exchange rate was devalued
twice—from 2.8 RMB/USD to 3.2 RMB/USD in October 1985 and from 3.2 RMB/USD to 3.7
RMB/USD in July 1986—the total range of depreciation was 32.14%.
In 1989 and 1990, there was a slightly overvaluation. This is because the high inflation rate in this
peorid.
From 1992 to 1995 RMB exchange rate is undervalued. The misalignment was most seriously in
1993, this was because that from the end of 1980s China economy is overheated; the demand of foreign
exchange exceeded the supply. In the swap market, the market rate reached 11.2 RMB/USD in May
1993, and this rate accounted for an important proportion in the process of forming RMB real effective
exchange rate.
From 1996 to 1998, RMB exchange rate is overvalued. Especially in 1997 and 1998 the
overvaluation was seriously. This overvaluation was due to the Asian financial crisis. Although this
crisis made RMB face a pressure of appreciation, China government keep the promise to keep the RMB
stable—not depreciate. This situation was mitigated from 1999.
In recent years, especially from 2002, RMB exchange rate is undervalued slightly. There are many
reasons for the appreciation pressure of RMB. The essential reason is that “strong economy creates
strong currency”. From 2002, the five fundamentals are all moving toward the situation that leads RMB
to appreciate.
So we think that RMB is facing an appreciation pressure from an academic perspective from 2002.
But the determination of exchange rate is more complicated than the economics model.
A country’s foreign exchange rate policy is designed to serve its own interest. In order to keep a
rapid and stable development, China should maintain an independent and stable exchange rate policy in
the foreseeable future.
In practice, it is proved that this level of RMB exchange rate can provide a sustained growth
environment, so it is a proper level for RMB. A stable and proper RMB exchange rate can facilitate trade;
benefit export; protect the market after the entry to WTO; reduce transaction cost; reduce speculation of
foreign capital. The most important is that it can establish a necessary environment for China to
stimulate demand, deep financial reform, and tackle its most urgent problems.
So we think in the best interest of both China and the world economy, China should maintain a
stable and proper RMB exchange rate in a short and even a medium run. However, in the long run,
China should take any good opportunity to increase the flexibility of RMB exchange rate, introduce
more market forces to the formation mechanism of exchange rate, and let RMB exchange rate reflect the
market supply and demand more accurately.
6. Conclusion
This paper reviews some literatures on assessment of RMB exchange rate and its misalignment
first. Then based on the development of exchange rate theories, this paper studies RMB by analyze
RMB equilibrium real exchange rate, and use real effective exchange rate as its best proxy. Using
cointegration technique this paper develops a model for RMB equilibrium real exchange rate, and
establishes a cointegration equation. We find that there are five variables that are cointegrated with RMB
real effective exchange rate: the ratio of M2 to GDP, the ratio of foreign reserve to GDP, the ratio of
government expenditure to GDP, terms of trade, and openness. This is a long-run and steady-state
relationship. Based on this equation, using the series of five fundamentals smoothed by the H-P filter
technique, we can estimate the RMB equilibrium real exchange rate, and assess its misalignment. We
find that from 1984 to 2002 RMB real effective exchange rate exhibited short or even medium
departures from the equilibrium real exchange rate, but the misalignments are not very large. The pattern
of the misalignment conforms to the economy fundamental analysis. Especially, the pressure of
depreciation from 1997 due to Asian financial crisis is mitigated from 1999. In recent years, especially
from 2002, RMB exchange rate is undervalued slightly. But we think this is only an academic view. In
the best interest of both China and the world economy, China should maintain an independent, proper
and stable RMB exchange rate.
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[2] John Baffes, Iberahim A. Elbadawi, Stephen A.O’Connell, single-Equation Estimation of The
Equilibrium Real Exchange Rate, 1997.
[3] Menzie D.Chinn, The Measurement of Real Effective Exchange Rates: A Survey and Applications to
East Asia, 2002.
[4] Sebastian Edwards, Exchange Rate Misalignment In Developing Countries, 1987, NBER Discussion
Paper 442.
[5] Sebastian Edwards, Real and Nominal Determinants of Real Exchange Rates: The Empirical
Evidence, NBER Working Paper 511, 1988
[6] Sebastian Edwards, Real Exchange Rate, Devaluation, and Adjustment: Exchange Rate Policy in
Developing Countries, MIT Press, 1989.
[7] Sebastian Edwards, Real Exchange Rates In The Developing Countries: Concepts and Measurement,
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Need To Know?, NBER Working Paper 7228, 1999.
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