In order to analyze the massive trade imbalance between China and America, we discuss the degree of RMB's misalignment in a tractable framework by estimating the long run equilibrium real effective exchange rate of the currency during 1980-2009 in this paper. Based on estimation of behavioral equilibrium exchange rate (BEER) and using Johansen co-integration technique, we conclude that RMB fluctuates around its long-run equilibrium exchange rate within a range of positive 3% and minus 4% bands. This implies that the currency has not been significantly undervalued or overvalued. According to the four control variables (terms of trade, GDP per capita, foreign exchange reserve and money supply), we deem that increase of foreign exchange reserve and per capita output, decrease of money supply will lead to the appreciation of RMB real effective exchange rate. Implications of the empirical findings of this study indicates China's exchange rate policy may have played an insignificant role in its trade surpluses.
Abstract
Ⅰ. Introduction
Ⅱ. China's recent exchange rate policies
Ⅲ. Literature review
Ⅳ. The Empirical model
Ⅴ. Empirical results
Ⅵ. Conclusions
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