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Forecasting the Chinese Yuan-US Dollar Exchange Rate under the New Chinese Exchange Rate Regime

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  • Imad A. Moosa

    (Department of Accounting and Finance, Monash University, Australia)

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    Abstract

    Two models are specified, estimated, and used to generate out-of-sample forecasts over the period since China announced a shift in exchange rate policy from a simple peg to the US dollar to a basket peg. The results show that the model that is based on a crawling peg is far superior to the model that is based on a basket peg. It is also shown that trading the Chinese yuan versus the US dollar is more profitable than otherwise when trading is based on the assumption of a crawling peg, in which case buy and hold is the best strategy. It is concluded that China must be using a crawling peg, which is not good news for the US but may be good news for foreign exchange traders.

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    Bibliographic Info

    Article provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.

    Volume (Year): 7 (2008)
    Issue (Month): 1 (April)
    Pages: 23-35

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    Handle: RePEc:ijb:journl:v:7:y:2008:i:1:p:23-35

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    Postal: 100 Wenhwa Road, Seatwen, Taichung
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    Related research

    Keywords: Chinese yuan; exchange rate regimes; forecasting;

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    References

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    1. Ronald McKinnon, 2007. "Why China Should Keep Its Dollar Peg," International Finance, Wiley Blackwell, vol. 10(1), pages 43-70, 03.
    2. Ashley, R & Granger, C W J & Schmalensee, R, 1980. "Advertising and Aggregate Consumption: An Analysis of Causality," Econometrica, Econometric Society, vol. 48(5), pages 1149-67, July.
    3. Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 216-27, June.
    4. Nouriel Roubini, 2007. "Why China Should Abandon Its Dollar Peg," International Finance, Wiley Blackwell, vol. 10(1), pages 71-89, 03.
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    Cited by:
    1. Vitalie Ciubotaru, 2012. "Identifying the De Facto Exchange Rate Regime for Moldova: A State-Space Approach," Discussion Papers in Economics and Business 12-10, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).

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