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The Chinese renminbi's co-movement with the US dollar: Addressing the numéraire issue

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  • Kunkler, Michael

Abstract

The Chinese renminbi moved to a managed floating exchange rate regime on the 21st of July 2005. We measure the renminbi's co-movement with the US dollar in this new regime with the Frankel-Wei regression framework, which has a well-known numéraire issue. The numéraire is responsible for a biased estimator of the regression coefficient. We measure this bias and propose an alternative risk-free multicurrency numéraire that removes the bias. We find that the unbiased estimated regression coefficient the renminbi's co-movement with the US dollar has reduced from an average of 0.927 for 2005-15, to an average of 0.517 for 2018-19.

Suggested Citation

  • Kunkler, Michael, 2021. "The Chinese renminbi's co-movement with the US dollar: Addressing the numéraire issue," Finance Research Letters, Elsevier, vol. 40(C).
    • Handle: RePEc:eee:finlet:v:40:y:2021:i:c:s1544612320300957
    DOI: 10.1016/j.frl.2020.101741
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    References listed on IDEAS

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    1. Jeffrey Frankel & Daniel Xie, 2010. "Estimation of De Facto Flexibility Parameter and Basket Weights in Evolving Exchange Rate Regimes," American Economic Review, American Economic Association, vol. 100(2), pages 568-572, May.
    2. Kunkler, Michael & MacDonald, Ronald, 2015. "Half-lives of currencies and aggregation bias," Economics Letters, Elsevier, vol. 135(C), pages 58-60.
    3. Mahieu, Ronald & Schotman, Peter, 1994. "Neglected common factors in exchange rate volatility," Journal of Empirical Finance, Elsevier, vol. 1(3-4), pages 279-311, July.
    4. Miss Sonali Das, 2019. "China’s Evolving Exchange Rate Regime," IMF Working Papers 2019/050, International Monetary Fund.
    5. Jeffrey A. Frankel & Shang-Jin Wei, 1994. "Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, pages 295-333, National Bureau of Economic Research, Inc.
    6. Henry N. Goldstein, 1964. "The Implications Of Triangular Arbitrage For Forward Exchange Policy," Journal of Finance, American Finance Association, vol. 19(3), pages 544-551, September.
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    Cited by:

    1. Kunkler, Michael, 2022. "Using the Special Drawing Right in the Frankel-Wei regression framework," Finance Research Letters, Elsevier, vol. 46(PB).
    2. Kunkler, Michael, 2022. "Implied betas for the Frankel–Wei regression framework," Economics Letters, Elsevier, vol. 218(C).
    3. Kunkler, Michael, 2023. "Multilateral exchange rates: A multivariate regression framework," Journal of Economics and Business, Elsevier, vol. 125.
    4. Zhang, Chen & Fang, Ying & Niu, Linlin, 2022. "Changing anchor of the renminbi: A Bayesian learning approach to the decade-long transition," Economic Modelling, Elsevier, vol. 116(C).
    5. Jiang, Xue & Li, Sai-Ping & Mai, Yong & Tian, Tao, 2022. "Study of multinational currency co-movement and exchange rate stability base on network game," Finance Research Letters, Elsevier, vol. 47(PA).

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    More about this item

    Keywords

    Foreign; Exchange; Rates;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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