Applicability Analysis of Purchasing Power Parity to RMB Exchange Rate

Abstract

This paper takes purchasing power parity(PPP) theory and RMB exchange rate as the research object. First, it uses policy analysis method, deviation degree method, real exchange rate method, and definition method to study the applicability of purchasing power parity theory in my country. Then, it selects monthly data from January 1994 to December 2022, and uses Johansen cointegration test method to test the multivariate cointegration relationship between the exchange rate of US dollar against RMB and the Sino-US price index. According to the research findings, a cointegration relationship exists among the three variables, but the experimental results are inconsistent with the theory. The final conclusion is that purchasing power parity still can't explain our country's exchange rate changes very well, but the feasibility of PPP in our country has been enhanced.