The balance of payments, in a narrow sense, refers to all foreign exchange receipts and payments that occur in a country's foreign economic exchanges. When a country's income exceeds its expenditure, it is a balance of payments surplus; On the contrary, when a country's income is less than its expenditure, it is a balance of payments deficit. When a country is in a balance of payments surplus, it is manifested in the foreign exchange market. It can be said that the supply of foreign exchange exceeds demand, so the exchange rate of local currency rises and the exchange rate of foreign currency falls. When a country is in the balance of payments deficit, the foreign exchange in the foreign exchange market is in short supply, so the local currency exchange rate drops and the foreign currency exchange rate rises. Equilibrium exchange rate method can be used to analyze the balance of payments factors determined by exchange rate.

For example, since the middle and late 1980s, the US dollar has been falling in the international economic market for a long time, while the Japanese yen, on the other hand, has been constantly appreciating. The main reason is that the United States has a long-term balance of payments deficit, while Japan continues to have a huge surplus. Looking at the trade part of the current account of the balance of payments, when a country's imports increase and produce a deficit, it will generate additional demand for foreign currency. At this time, it will cause foreign exchange appreciation and local currency depreciation in the foreign exchange market. On the contrary, when a country has a current account surplus, it will cause an increase in foreign demand for the country's currency, an increase in foreign exchange supply and an increase in the local currency exchange rate.

Inflation factor

(1) Analyze the determinants of inflation, purchasing power parity index and exchange rate.

Under the paper currency circulation system, the conversion basis between currencies is the value contained in each currency, that is to say, the exchange rate is essentially the exchange rate formed on the basis of the value of two currencies. If the intrinsic value of money decreases, then its external value, that is, the exchange rate, will inevitably decrease. Inflation appeared after paper money replaced metal coins, which showed a general rise in commodity prices. The essence of the decrease in the purchasing power of money is the decrease in the intrinsic value of money.

Because the exchange rate involves the comparison of the values of two currencies, it is necessary to examine the inflation situation of the two countries at the same time, that is, to examine the relative proportion of inflation in the two countries. Generally speaking, a country with a relatively high inflation rate will see its domestic value decline faster, so its currency exchange rate will also decline. If the inflation rates of the two countries are very close, the impact on the exchange rate will offset each other, and the nominal exchange rate should not be affected.

Inflation is a long-term, major and regular factor affecting exchange rate changes. Under the condition of paper money circulation, the ratio between the currencies of the two countries is basically determined according to the comparative relationship between the values they represent. Therefore, in the case of inflation in a country, the value represented by its currency will decrease, its actual purchasing power will also decrease, and its foreign exchange rate will also decrease. Of course, if there is inflation in the other country, and the magnitude is just the same, the two will offset each other, and the nominal exchange rate of the two currencies can be unaffected. However, this situation is rare after all. Generally speaking, the inflation rates of these two countries are different. The exchange rate of countries with high inflation rate declines, while the exchange rate of countries with low inflation rate rises. It is particularly noteworthy that the impact of inflation on the exchange rate generally takes some time to show, because its impact is often reflected through some economic mechanisms: the trade mechanism of goods and services, international capital flow channels, psychological expectation channels and so on.

(2) Absolute purchasing power parity index

Absolute purchasing power parity refers to the ratio of the price levels of the two countries at a certain point in time, which shows the static determination of the exchange rates of the two currencies at a certain point in time.

Let's assume that the price levels of A and B at T are Pa and Pb respectively, and S is the exchange rate. Then:

………(2-2-28)

For example, the price level of the United States is twice that of Britain, so the purchasing power parity of the two countries is:

2$/? ………(2-2-29)

The above general price level refers to the average price level of all goods and services in a country, which is an incalculable quantity. Therefore, using absolute purchasing power parity to calculate exchange rate is of low practicability and operability. Its shortcomings are overcome by looking at relative purchasing power parity from a dynamic point of view.

(3) Relative purchasing power parity index

Relative purchasing power parity index refers to the relationship between the exchange rate changes in a certain period and the relative price changes of the two countries in that period, which indicates the exchange rate decisions of the two currencies in a dynamic period. If the following label 0 represents the base period, 1 represents the reporting period. The calculation formula of relative purchasing power parity is:

………(2-2-30)

For example, the basic exchange rate of the US dollar against the British pound is 2$/? . Due to the worldwide inflation of capitalism, the British price index rose from 100 in the base period to 240 in the next period, while the American price index rose to 320 in the same period. Obviously, the price levels of the two countries have changed to varying degrees, and the basic exchange rate is $2/? It is no longer in line with the newly formed purchasing power comparison relationship between the two currencies, and it is necessary to adjust the basic exchange rate according to the relative changes in prices between the two countries in order to re-determine the new equilibrium exchange rate:

×2$/? =2.66$/? ………(2-2-3 1)

2.3.3 Interest rate factors

(1) interest rate and exchange rate determination

Interest rate is the "price" of funds, that is, the price of obtaining the use of funds or the income from transferring the use of funds. Interest rate represents the external attraction of a country's financial assets, which will directly lead to international arbitrage capital flows and exchange rate fluctuations. Usually, the change of interest rate will first affect the balance of supply and demand of domestic currency, thus affecting the exchange rate level. When the interest rate of a country's monetary fund increases relatively, the cost of using its own currency increases relatively, which makes the supply of its own currency in the foreign exchange market decrease relatively; At the same time, when the interest rate increases relatively, the income of the transferred funds will also increase relatively, thus attracting foreign capital inflows and increasing the foreign currency supply in the foreign exchange market. In this way, from two aspects, the relative rise of domestic interest rate will promote the rise of domestic currency exchange rate. On the contrary, the exchange rate of the country's currency will depreciate.

To examine the interest rate factor, we should still examine the different interest rates of the two currencies, that is, the relative interest rate. If one country's interest rate rises, but other countries also rise at the same speed, the exchange rate will generally not be affected; If one country's interest rate rises, but other countries' interest rates rise faster, then this country's interest rate will fall relatively, and its exchange rate will tend to fall. In addition, the impact of interest rate changes on international capital flows should also consider the factors of expected exchange rate changes. Only when the sum of the expected change rate of foreign interest rate plus exchange rate is greater than the domestic interest rate, the transfer of funds abroad will be profitable. This is the "interest rate parity" of international capital arbitrage activities, which is very famous in the international financial field.

Finally, the impact of a country's interest rate changes on the exchange rate can also be exerted through trade projects. When the national interest rate rises, it means that the opportunity cost of domestic residents' consumption increases, leading to a decline in consumer demand. At the same time, it also means that the cost of capital utilization increases and the demand for domestic investment decreases. In this way, the decline in the overall level of domestic effective demand will expand exports and reduce imports, thereby increasing the country's foreign exchange supply, reducing its foreign exchange demand and appreciating its currency exchange rate. However, what needs to be emphasized here is that the impact of interest rate factors on the exchange rate is short-term, and the effect of maintaining a strong exchange rate only by high interest rates is limited, because it is easy to cause exchange rate overvaluation, and once the exchange rate overvaluation is recognized by market investors and speculators, it is likely to produce a more serious wave of local currency depreciation. For example, in the early 1980s, after Reagan took office in the White House, in order to ease inflation and promote economic recovery, he adopted a tight monetary policy and substantially raised interest rates. Therefore, the dollar continued to appreciate in the first half of the 1980s. However, with the depression of 1985 American economy, the overvaluation of the US dollar became very obvious, which led to a sharp rise of the US dollar in the autumn of 1985.

2.3.4 Difference factors of economic growth rate

Other things being equal, if a country's real economic growth rate is faster than that of other countries, its national income will also increase faster, which will increase the country's demand for foreign goods and services. As a result, the country's demand for foreign exchange will tend to increase relative to its available foreign exchange supply, which will lead to the decline of its currency exchange rate. But here we should pay attention to two special situations: first, for export-oriented countries, economic growth is driven by the increase of exports, so the rapid economic growth is accompanied by the rapid growth of exports. At this time, the increase of exports often exceeds the increase of imports, and its exchange rate rises instead of falling; Second, if domestic and foreign investors regard the country's high economic growth rate as a reflection of promising economic prospects and improved return on capital, they may expand their investment in the country and even offset the current account deficit. At this time, the country's exchange rate may rise instead of falling. These two situations coexist in China, and China has been under great pressure of RMB appreciation since July 2005.

2.3.5 Financial revenue and expenditure status factors

The government's fiscal revenue and expenditure are often used as the main indicators of the country's currency exchange rate forecast. When a country has a fiscal deficit, whether its currency exchange rate rises or falls (under the floating exchange rate system) mainly depends on the measures chosen by the government to make up for the fiscal deficit. Generally speaking, in order to make up the fiscal deficit, a government can take four measures: first, it can increase its fiscal revenue by raising the tax rate, if so, it will reduce the disposable income level of individuals, thus reducing the personal consumption demand, while raising the tax rate will reduce the investment profit rate of enterprises, leading to a decline in investment enthusiasm and investment demand, leading to a decrease in imports of capital goods and consumer goods, and an increase in exports, which in turn will lead to an appreciation of the exchange rate; Second, reducing government public expenditure will reduce national income, reduce import demand and promote exchange rate appreciation through multiplier effect; Third, issuing additional currency, which will lead to inflation, which will lead to the depreciation of the country's currency exchange rate; Fourth, the issuance of government bonds will lead to greater price increases in the long run, and will also cause the country's currency exchange rate to decline. Of these four measures, the government is more likely to choose the latter two, especially the last one, because issuing government bonds is the least likely to bring antagonism to its residents. On the contrary, because national debt is known as "Phnom Penh bond", it provides investors with better investment opportunities and is welcomed by people all over the world. Therefore, when a country has a fiscal deficit, its currency exchange rate tends to depreciate.

2.3.6 Foreign exchange reserve factors

The adequacy of foreign exchange reserves held by a country's central bank reflects the country's ability to intervene in the foreign exchange market and maintain exchange rate stability, so the level of foreign exchange reserves plays a major role in the country's monetary stability. Too little foreign exchange reserves will often affect the confidence of the foreign exchange market in the stability of the domestic currency, which will lead to depreciation; On the contrary, foreign exchange reserves are sufficient, and the country's currency exchange rate is often strong. For example,1From March to mid-April 1995, the dollar crisis broke out in the international foreign exchange market. The very important reason is that the Clinton administration used the $20 billion presidential foreign exchange stabilization fund to alleviate the Mexican financial crisis at that time and shook the confidence of the foreign exchange market in the ability of the US government to intervene in the foreign exchange market.

2.3.7 Relative labor productivity difference factors

This can be reflected in the theory of "Balassa-Samuelson effect". The theoretical core of "Balassa-Samuelson Effect" can be summarized as follows: If law of one price is established in the tradable goods departments of the two countries, and cross-sectoral wage equalization is established in the tradable goods and nontradable goods departments of the two countries, then the deviation of the relative labor productivity of the two departments will lead to the deviation of the relative nontradable goods price of the two countries, which will lead to the change of the equilibrium exchange rate.

"Balassa-Samuelson effect" plays a role in a country, which makes the change of relative labor productivity of two departments in the country lead to the change of relative price of non-tradable goods in the country. Under the influence of law of one price, the basic way for rational traders to maximize profits is to improve labor productivity, but in front of rational workers, the improvement of labor productivity will inevitably lead to the increase of wages of workers in their own departments. On the other hand, under the assumption that domestic labor can flow freely, workers seeking to maximize utility will inevitably flow from low-wage departments to high-wage departments. The hypothesis of labor scarcity forces manufacturers in the non-tradable goods sector to raise wages, and the prices in the non-tradable goods sector will also increase accordingly, and the price level of the whole society will undergo structural changes and systematic improvement.

"Balassa-Samuelson effect" plays an important role in the international arena. Changes in the relative productivity of the two departments of the two countries lead to changes in the relative prices of non-tradable goods between the two countries, as well as changes in the equilibrium real exchange rate and the equilibrium exchange rate. Changes in the relative productivity of the two countries will lead to changes in the relative prices of non-tradable goods and structural changes in the overall price level of the two countries. Because this change is based on the assumption that the price level of non-tradable goods sector is equal to the wage level, the change of the overall price level of the two countries corresponds to the change of the per capita income level of the two countries. The increasing functional relationship between the per capita income level of the two countries and the purchasing power parity and the equilibrium exchange rate ratio will lead to changes in the opposite direction and changes in the real exchange rate level measured by the equilibrium exchange rate in the same direction.

2.3.8 Other influencing factors

(1) psychological expectation factors

In the foreign exchange market, whether people buy or sell a certain currency has a lot to do with traders' views on the future. When traders expect that the exchange rate of a currency may fall in the future, in order to avoid losses or gain extra benefits, they will throw out a lot of this currency, and when they expect that a currency may rise in the future, they will buy a lot of this currency. Some foreign exchange experts in the world even think that the expectation psychology of foreign exchange traders for a certain currency is the most important factor to determine the exchange rate changes in this currency market, because under the control of this expectation psychology, a large-scale movement of funds will be induced in the blink of an eye. Because the formation of foreign exchange traders' expectation psychology generally depends on a country's economic growth rate, money supply, interest rate, balance of payments and foreign exchange reserves, government economic reform, international political situation and some unexpected events and other complex factors. Therefore, the expectation psychology not only has a great influence on the exchange rate, but also has the characteristics of uncertainty and variability.

(2) Information factors

The modern foreign exchange market has gradually developed into an efficient market because of the highly developed communication facilities, the close ties between financial markets of various countries and the increasingly perfect trading technology. Therefore, any small profit opportunity in the market will immediately lead to a large-scale international flow of funds, thus making this profit opportunity disappear rapidly. In this case, whoever gets the "news" or information that can affect the supply-demand relationship and expected psychology in the foreign exchange market first may react immediately before other market participants know the truth, thus making a profit. At the same time, we should pay special attention to the reaction of the foreign exchange market to the "news" released by the government, which depends not only on whether the "news" itself is "good news" or "bad news", but also on whether it is expected or better or worse than expected. In short, in the increasingly developed foreign exchange market, information factors have a subtle and powerful influence on exchange rate changes.

(3) government intervention factors

Exchange rate fluctuations will have an important impact on a country's economy. At present, governments (central banks) often intervene in the foreign exchange market in order to stabilize the foreign exchange market and maintain healthy economic development. There are four main intervention methods: ① buying or selling foreign exchange directly in the foreign exchange market; ② Adjust domestic monetary policy and fiscal policy; (3) making comments on an international scale, affecting market psychology; (4) Joint direct or indirect intervention with other countries through policy coordination. This kind of intervention is sometimes large in scale and momentum, and often billions of dollars can be invested in the market within a few days. Of course, this is only a drop in the bucket compared with the current foreign exchange market with the transaction scale exceeding 1.2 trillion US dollars, but to some extent, government intervention, especially international joint intervention, can affect the psychological expectation of the whole market and then reverse the exchange rate trend. Therefore, although the long-term trend of exchange rate cannot be fundamentally changed, in many cases, it has a great influence on the short-term fluctuation of exchange rate.

According to whether other financial policies are adopted at the same time when intervening in the foreign exchange market, the intervention of the central bank is generally divided into sterilization intervention and non-sterilization intervention. Non-sterilisation intervention means that the central bank does not adopt other financial policies to cooperate with it when intervening in the foreign exchange market, that is, it does not change the changes in the money supply caused by foreign exchange intervention; On the contrary, write-off intervention means that the central bank intervenes in the foreign exchange market and adopts other financial policy tools to cooperate with it, such as reverse operation in the open market, in order to change the changes in the money supply caused by foreign exchange intervention. Generally speaking, because non-sterilization intervention directly changes the money supply and may change economic variables such as interest rate, its impact on the exchange rate is relatively lasting, but it will lead to changes in other domestic economic variables and interfere with the realization of domestic financial policy objectives; Because sterilization intervention basically does not change the money supply, it is difficult to cause changes in interest rates, so its impact on the exchange rate is relatively small, but it will not interfere with the realization of other domestic financial policy objectives and will not sacrifice macroeconomic stability.

The above factors are based on the results of theoretical analysis, or conclusions drawn on the basis of economic theories such as balance of payments theory and exchange rate determination theory, and have been tested by western exchange rate theory. However, whether these factors are also applicable to the determination of the RMB equilibrium exchange rate, the degree of applicability and the degree of influence need further analysis and testing. At the same time, the transferability of these factors in practical empirical research, that is, whether we can find the path to transform nominal variables into real variables, is also a question to be considered whether these factors can be included in practical research.