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Exchange Rate Misalignment - The Case of the Chinese Renminbi

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  • Yin-Wong Cheung

Abstract

Assessing exchange rate misalignment is not an easy task. With reference to the debate on the value of China’s currency, the renminbi (RMB), this article highlights a few challenges in properly assessing the extent of currency misalignment. The results derived from the fundamental equilibrium exchange rate (FEER) approach and the Penn effect regression are used to illustrate the sensitivity of misalignment estimate to assumptions of the key parameters in a given model, sampling uncertainty, serial correlation adjustment, and data revision. It is shown that both the sign and the magnitude of a misalignment estimate could be dramatically affected by these factors.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-04/cesifo1_wp3797.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3797.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3797

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Keywords: FEER; Penn effect; sampling uncertainty; serial correlation; data revision;

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  1. Cheung, Yin-Wong & Chinn, Menzie David & Garcia Pascual, Antonio, 2003. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," Santa Cruz Department of Economics, Working Paper Series qt12z9x4c5, Department of Economics, UC Santa Cruz.
  2. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  3. Steven Dunaway & Lamin Leigh & Xiangming Li, 2009. "How Robust Are Estimates Of Equilibrium Real Exchange Rates: The Case Of China," Pacific Economic Review, Wiley Blackwell, vol. 14(3), pages 361-375, 08.
  4. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2007. "The Overvaluation of Renminbi Undervaluation," NBER Working Papers 12850, National Bureau of Economic Research, Inc.
  5. Samuelson, Paul A, 1994. "Facets of Balassa-Samuelson Thirty Years Later," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 201-26, October.
  6. Willem Thorbecke & Hanjiang Zhang, 2009. "The Effect Of Exchange Rate Changes On China'S Labour-Intensive Manufacturing Exports," Pacific Economic Review, Wiley Blackwell, vol. 14(3), pages 398-409, 08.
  7. 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.
  8. Irving B. Kravis & Robert E. Lipsey, 1986. "The Assessment of National Price Levels," NBER Working Papers 1912, National Bureau of Economic Research, Inc.
  9. Jordi Prat & Leandro Medina & Alun H. Thomas, 2010. "Current Account Balance Estimates for Emerging Market Economies," IMF Working Papers 10/43, International Monetary Fund.
  10. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  11. Kwack, Sung Yeung & Ahn, Choong Y. & Lee, Young S. & Yang, Doo Y., 2007. "Consistent estimates of world trade elasticities and an application to the effects of Chinese Yuan (RMB) appreciation," Journal of Asian Economics, Elsevier, vol. 18(2), pages 314-330, April.
  12. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2010. "Measuring Renminbi Misalignment: Where Do We Stand?," Working Papers 242010, Hong Kong Institute for Monetary Research.
  13. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  14. Irving B. Kravis & Robert E. Lipsey, 1982. "Towards an Explanation of National Price Levels," NBER Working Papers 1034, National Bureau of Economic Research, Inc.
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