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How Robust are Estimates of Equilibrium Real Exchange Rates: The Case of China

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Author Info
Steven Vincent Dunaway
Lamin Leigh
Xiangming Li
Abstract

Increased attention is being paid to assessments of the actual values of countries' real exchange rates relative to their "equilibrium" values as suggested by "fundamental" determining factors. This paper assesses the robustness of alternative approaches and models commonly used to derive equilibrium real exchange rate estimates. Using China's currency to illustrate this analysis, the variance in estimates raises serious questions regarding how robust the results are. The basic conclusion from the tests used here is that, at least for China, small changes in model specifications, explanatory variable definitions, and time periods used in estimation can lead to very substantial differences in equilibrium real exchange rate estimates. Thus, such estimates should be treated with great caution.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/220.

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Length: 13 pages
Date of creation: 13 Oct 2006
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Handle: RePEc:imf:imfwpa:06/220

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Keywords: China's equilibrium real exchange rate robustness tests Exchange rates China Purchasing power parity

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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, vol. 59(1), pages 47-76, January. [Downloadable!] (restricted)
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  2. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July. [Downloadable!] (restricted)
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  3. Morris Goldstein, 2004. "Adjusting China's Exchange Rate Policies," Peterson Institute Working Paper Series WP04-1, Peterson Institute for International Economics. [Downloadable!]
  4. Virginie Coudert & Cecile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center. [Downloadable!]
  5. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July. [Downloadable!] (restricted)
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  6. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2005. "Why the renminbi might be overvalued (but probably isn’t)," Proceedings, Federal Reserve Bank of San Francisco. [Downloadable!]
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  1. Eswar S. Prasad, 2007. "Is the Chinese Growth Miracle Built to Last?," IZA Discussion Papers 2995, Institute for the Study of Labor (IZA). [Downloadable!]
  2. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2007. "The Overvaluation of Renminbi Undervaluation," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  3. Robert Lafrance, 2008. "China's Exchange Rate Policy: A Survey of the Literature," Discussion Papers 08-5, Bank of Canada. [Downloadable!]
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