Equilibrium Real Exchange Rate of RMB and the Optimal Elastic Band Measurement
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| Title | Equilibrium Real Exchange Rate of RMB and the Optimal Elastic Band Measurement
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| Author | Wang Aijian and Lin Nan |
| Organization | Tianjin University of Finance and Economics |
| Email | aijianw@163.com；ln831@163.com |
| Key Words | Equilibrium Real Exchange Rate; Relative Monetary Structure; Optimal Elastic Band of REER; RMB Internalization |
| Abstract | It is important to keep RMB exchange rate stable in a reasonable and balanced band for RMB Internalization. This paper extends the PPP from the real exchange rate decomposition and Balassa-Samuelson effect in the long-run and in short-run by UIP expansion analysis. In order to reflect the UIP risk premium，the paper introduces domestic and foreign relative currency structure difference factors. As for China’s economic transition and capital account control, we sum up the key factors, as the real exchange rate’s main determinants, and with the help of cointegration test and dynamic analysis, the paper presents a framework considering the real economy and the monetary economy, under which the RMB real exchange rate misalignment is not serious. On the basis of cointegration and dynamic regression analysis, the paper estimates that the RMB real effective exchange rate’s optimal elastic band is about 6%, which in the general case the elastic band is enough, and in 2011 REER has already appreciated excessively. So we should be careful with appreciation of RMB REER. |
| Serial Number | WP350 |
| Time | 2012-08-31 |
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