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Beyond Cheap Talks: Assessing the Undervaluation of the Chinese Currency Between 1994 and 2007

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  • Jinzhao Chen

Abstract

Relying on new cointegration framework with structural breaks in the deterministic trend, this article employs the behavioral equilibrium exchange rate (BEER) approach to estimate the equilibrium real exchange rate of Renminbi (RMB) and exchange rate misalignment in China from 1994Q1 to 2007Q4. The main findings of the article are that RMB was overvalued during the Asian Financial crisis and during the period of 2001-2002. It was undervalued to a mild extent only during recent period from 2003 to 2005, except at the beginning of the sample; furthermore, slight overvaluations have appeared after the reform of exchange rate regime in 2005. Interpretations are given to shed some light on these movements.

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Bibliographic Info

Article provided by CEPII research center in its journal Economie Internationale.

Volume (Year): (2009)
Issue (Month): 119 ()
Pages: 47-82

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Handle: RePEc:cii:cepiei:2009-3tc

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Keywords: Behavioral equilibrium exchange rate; renminbi; misalignment; cointegration; structural break;

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References

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  1. Se-Eun Jeong & Jacques Mazier, 2003. "Exchange Rate Regimes and Equilibrium Exchange Rates in East Asia," Revue économique, Presses de Sciences-Po, vol. 54(5), pages 0-0.
  2. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals," IMF Working Papers 98/67, International Monetary Fund.
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  4. Morris Goldstein, 2004. "Adjusting China's Exchange Rate Policies," Working Paper Series WP04-1, Peterson Institute for International Economics.
  5. Ronald MacDonald, 1997. "What Determines Real Exchange Rates? The Long and Short of it," IMF Working Papers 97/21, International Monetary Fund.
  6. Coudert, Virginie & Couharde, Cecile, 2007. "Real equilibrium exchange rate in China is the renminbi undervalued?," Journal of Asian Economics, Elsevier, vol. 18(4), pages 568-594, August.
  7. Clostermann, Jörg & Schnatz, Bernd, 2000. "The determinants of the euro-dollar exchange rate: synthetic fundamentals and a non-existing currency," Discussion Paper Series 1: Economic Studies 2000,02, Deutsche Bundesbank, Research Centre.
  8. Michael Funke & Jörg Rahn, 2005. "Just how Undervalued is the Chinese Renminbi," Quantitative Macroeconomics Working Papers 20504, Hamburg University, Department of Economics.
  9. Eswar Prasad, 2004. "China's Growth and Integration into the World Economy," IMF Occasional Papers 232, International Monetary Fund.
  10. Zhang, Zhichao, 2001. "Real Exchange Rate Misalignment in China: An Empirical Investigation," Journal of Comparative Economics, Elsevier, vol. 29(1), pages 80-94, March.
  11. Jeffrey Frankel, 2005. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate," NBER Working Papers 11274, National Bureau of Economic Research, Inc.
  12. Baffes, John & Elbadawi, Ibrahim A. & O'Connell, Stephen A., 1997. "Single-equation estimation of the equilibrium real exchange rate," Policy Research Working Paper Series 1800, The World Bank.
  13. Dominique Desruelle & Alessandro Zanello, 1997. "A Primeron the IMF's Information Notice System," IMF Working Papers 97/71, International Monetary Fund.
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Cited by:
  1. Christopher Garroway & Burcu Hacibedel & Helmut Reisen & Edouard Turkisch, 2012. "The Renminbi and Poor‐country Growth," The World Economy, Wiley Blackwell, vol. 35(3), pages 273-294, 03.
  2. You, Kefei & Sarantis, Nicholas, 2012. "Structural breaks and the equilibrium real effective exchange rate of China: A NATREX approach," China Economic Review, Elsevier, vol. 23(4), pages 1146-1163.
  3. Bineau, Yannick, 2010. "Renminbi's misalignment: A meta-analysis," Economic Systems, Elsevier, vol. 34(3), pages 259-269, September.
  4. Dai, Meixing, 2012. "In Search of an Optimal Strategy for Yuan’s Real Revaluation," MPRA Paper 41047, University Library of Munich, Germany.
  5. Gan, Christopher & Ward, Bert & Ting, Su Ting & Cohen, David A., 2013. "An empirical analysis of China's equilibrium exchange rate: A co-integration approach," Journal of Asian Economics, Elsevier, vol. 29(C), pages 33-44.

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