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Estimating China's "Equilibrium" Real Exchange Rate

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  • Xiangming Li
  • Steven Vincent Dunaway
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    Abstract

    The number of studies attempting to estimate the "equilibrium" real value of China''s currency has proliferated in recent years as the country''s presence in world markets has grown. These studies have sought to establish whether or not a significant part of China''s competitive prowess can be attributed to the foreign exchange value of the renminbi. Unfortunately, no consensus has emerged because the studies yield a very wide range of estimates. The paper looks at a sample of these studies, with estimates of undervaluation ranging from zero to nearly 50 percent. It attributes the wide variation in these estimates to the influence of such factors as the different methodologies used, explanatory variables included, subjective judgments of the various researchers in deriving their results, and instability in underlying economic relationships, especially in a rapidly developing economy like China.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/202.

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    Length: 12
    Date of creation: 01 Oct 2005
    Date of revision:
    Handle: RePEc:imf:imfwpa:05/202

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    Related research

    Keywords: Exchange rates; Purchasing power parity; exchange rate; real exchange rate; current account balance; trade model; balance of payments; equilibrium exchange rate; effective exchange rate; real effective exchange rate; foreign exchange; current accounts; terms of trade; trading partners; per capita income; exchange rate regimes; real exchange rates; external position; nominal exchange rate; world markets; equilibrium ? exchange rate; exchange rate policies; bilateral real exchange rate; international trade; world trade; partial equilibrium; world economy; movements in exchange rates; domestic prices; trade effect; transition economies; exchange rate change; partner countries; producer price index; exchange rate changes; trade effects; exchange rate dynamics; prevailing exchange rate; exchange rate arrangement; fixed exchange rate; trade regime;

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    References

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    1. Eichengreen, Barry, 2004. "Chinese Currency Controversies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4375, C.E.P.R. Discussion Papers.
    2. Se-Eun Jeong & Jacques Mazier, 2003. "Exchange Rate Regimes and Equilibrium Exchange Rates in East Asia," Revue économique, Presses de Sciences-Po, Presses de Sciences-Po, vol. 54(5), pages 0-0.
    3. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, Elsevier, vol. 59(1), pages 47-76, January.
    4. Frankel, Jeffrey, 2004. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adustment under a Flexible Rate," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp04-037, Harvard University, John F. Kennedy School of Government.
    5. Morris Goldstein, 2004. "Adjusting China's Exchange Rate Policies," Working Paper Series, Peterson Institute for International Economics WP04-1, Peterson Institute for International Economics.
    6. Virginie Coudert & Cécile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
    7. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 3-24, February.
    8. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 34(2), pages 647-668, June.
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    Cited by:
    1. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2008. "Pitfalls in Measuring Exchange Rate Misalignment: The Yuan and Other Currencies," NBER Working Papers 14168, National Bureau of Economic Research, Inc.
    2. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2007. "The Overvaluation of Renminbi Undervaluation," NBER Working Papers 12850, National Bureau of Economic Research, Inc.
    3. Robert N. McCauley & Guonan Ma & Yin-Wong Cheung, 2009. "Renminbisation des actifs internationaux de la Chine," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 95(2), pages 135-155.
    4. Ramkishen S. Rajan & Reza Y. Siregar, 2007. "Models of Equilibrium Real Exchange Rates Revisited: A Selective Review of the Literature," Working Papers id:1198, eSocialSciences.

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