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New Estimates of the Equilibrium Exchange Rate: The case for the Chinese renminbi

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  • SATO Kiyotaka
  • SHIMIZU Junko
  • Nagendra SHRESTHA
  • Zhaoyong ZHANG

Abstract

We estimate the equilibrium exchange rate (EER) of the Chinese renminbi (RMB) vis-a-vis the U.S. dollar from 1992 to 2008. In contrast to the recent empirical studies on the EER employing a large cross-country analysis, we focus on the supply side real factors in estimating the EER by extending the Yoshikawa (1990) model. To better reflect China's processing exports in the context of growing intra-regional trade in Asia, we incorporate in the empirical analysis the source country breakdown data on import prices and input coefficients of intermediate inputs by constructing an annual new International Input-Output (IIO) table for the period from 1992 to 2008. The results show that the EER of Chinese RMB appreciates sharply from 2005 to 2008, suggesting that the current RMB exchange rate has been substantially undervalued and should be revalued by 65 percent from the year 2000 level. Such sharp appreciation of the EER corresponds to the dramatic increase in China's current account surplus from the mid-2000s, especially against the United States, which is ascribed to the significant improvement of both labor and intermediate input coefficients in China.

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Bibliographic Info

Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 10045.

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Length: 25 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:eti:dpaper:10045

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  1. Yin-wong Cheung & Menzie D. Chinn & Eiji Fujii, 2007. "The Overvaluation of Renminbi Undervaluation," Working Papers 112007, Hong Kong Institute for Monetary Research.
  2. Yushi Yoshida & Shinji Takagi, 1999. "Exchange Rate Movements and Tradable Goods Prices in East Asia," IMF Working Papers 99/31, International Monetary Fund.
  3. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
  4. Menzie D. Chinn & Shang-Jin Wei, 2009. "A Faith-based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment?," Working Papers 122009, Hong Kong Institute for Monetary Research.
  5. Jaewoo Lee & Jonathan David Ostry & Alessandro Prati & Luca Antonio Ricci & Gian-Maria Milesi-Ferretti, 2008. "Exchange Rate Assessments," IMF Occasional Papers 261, International Monetary Fund.
  6. Robert Koopman & Zhi Wang & Shang-Jin Wei, 2008. "How Much of Chinese Exports is Really Made In China? Assessing Domestic Value-Added When Processing Trade is Pervasive," NBER Working Papers 14109, National Bureau of Economic Research, Inc.
  7. Virginie Coudert & C├ęcile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
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Cited by:
  1. Fukao, Kyoji & Yuan, Tang jun, 2012. "China's Economic Growth, Structural Change and the Lewisian Turning Point," CEI Working Paper Series 2012-04, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  2. Zhang, Zhibai & Chen, Langnan, 2013. "A New Assessment of the Chinese RMB Exchange Rate," MPRA Paper 49315, University Library of Munich, Germany.
  3. Wang, Gang-Jin & Xie, Chi, 2013. "Cross-correlations between Renminbi and four major currencies in the Renminbi currency basket," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(6), pages 1418-1428.
  4. Zhibai, Zhang, 2012. "A Simple Model and Its Application in the Valuation of Five Asian Real Exchange Rates," MPRA Paper 40953, University Library of Munich, Germany.

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