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Frontiers of Economics in China

Front. Econ. China    2010, Vol. 5 Issue (2) : 210-231
Research articles
The Internal and External Equilibrium Exchange Rate of RMB: 1982–2010
Yizhong Wang ,
College of Economics, Zhejiang University, Hangzhou 310058, China;
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Abstract This paper estimates fundamental equilibrium exchange rate of RMB based on internal and external balance of China’s economy. The findings indicate that RMB real exchange rate is overvalued in the period of 1982–1991, but the extent of the undervaluation has an enlarging trend since 2004. Then, we put forward a new theory called “Prior Equilibrium Exchange Rate” and apply it to RMB, finding that real effective exchange rate of RMB need to be appreciated about 20% between 2008 and 2010, and the appreciation range of bilateral nominal exchange rate between RMB and the world’s key currencies depends on the objective functions of the government. Policy implication indicates that decision makers need to refer to equilibrium exchange rate which is derived from different theories and to make great efforts to adjust it towards equilibrium level and establish RMB “Prior Equilibrium Exchange Rate.” Meanwhile, policy- makers should implement a potential objective interval system of exchange rate appreciation. The appreciation range of bilateral exchange rate of RMB against USD from 2008 to 2010 may be set between 6% to 10%.
Keywords real exchange rate      current account      prior equilibrium exchange rate      
Issue Date: 05 June 2010
 Cite this article:   
Yizhong Wang. The Internal and External Equilibrium Exchange Rate of RMB: 1982–2010[J]. Front. Econ. China, 2010, 5(2): 210-231.
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