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A twelve-area model for the equilibrium Chinese Yuan/US dollar nominal exchange rate

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  • You, Kefei
  • Sarantis, Nicholas
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    Abstract

    This paper investigates the equilibrium CNY/USD nominal exchange rate during 1976–2008. We extend for the first time the five-area FABEER model to a twelve-area TABEER model for China. All parameters are estimated with allowance for endogenous structural breaks. Our investigation of the sustainable current account highlights macroeconomic factors that determine savings and investment in the medium-term. We find that all cointegration relationships are subject to structural breaks. The equilibrium nominal rate was overvalued in most years from early 1990s until 2003. It has been strongly undervalued during 2004–2008. We further compute misalignment rates using a sustainable current account of 3%. Our findings suggest such exogenous input leads to results biased towards larger undervaluation.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 22 (2012)
    Issue (Month): 1 ()
    Pages: 151-170

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    Handle: RePEc:eee:intfin:v:22:y:2012:i:1:p:151-170

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    Web page: http://www.elsevier.com/locate/intfin

    Related research

    Keywords: Fundamental equilibrium exchange rate; TABEER model; Nominal CNY/USD; Structural breaks; China;

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    Cited by:
    1. 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.

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