Abstract: This paper decomposes the RMB real exchange rate on the basis of “Balassa-Samuelson” theorem, finding that the deviation from the law of one price is the leading cause of the real exchange rate fluctuation before 2012 and the influence of the relative price fluctuation on the fluctuation has been more obvious since 2012. Later on, this paper uses a TVP-VAR model to study the inter[1]action mechanism between value growth rate of the three main industries and the two factors. The result shows that the interaction mechanism between the deviation from the law of one price and added value growth rate of the three main industries is moderate; but at the end of the sample period, the negative effect of the relative price fluctuation on the added value growth rate of the three main industries has been more obvious. Due to China’s current tradable goods’ excessive capacity, the price gap between non-tradable goods and tradable goods continues to expand and results in a negative effect on the development of the three main industries. Therefore, the government and monetary authorities should pay more attention to the problem, adjust the structure of foreign trade, reduce the cost of tradable goods, revitalize the stocks, and narrow the gap of domestic and overseas relative prices, so that reasonable assurances can be provided for the sustainable development of the national economy and the industrial structure optimization.

Keywords: Real exchange rate; TVP- VAR model; “Balassa-Samuelson” Effect; Industrial structure adjustment; Time-varying impulse