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Estimating currency misalignment using the Penn effect: It is not as simple as it looks

Author

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  • Yin†Wong Cheung
  • Menzie Chinn
  • Xin Nong

Abstract

We investigate the robustness of the Penn effect—the finding that the price level is higher in countries with a higher per capita income—over different samples, measures, and specifications. Testing for the Penn effect has been hampered by the imprecision of the price measures, so that use of different versions of the data set can lead to substantially different results. We find that the price level†income elasticity is fairly consistently estimated across data sets. However, there is some evidence that the relationship is non†linear. For developed economies, the quadratic term implies an inverted U†shaped relationship. Developing economies, on the other hand, display a U†shaped relationship. Estimates of misalignment differ, depending on the choice of specification and data sets. It appears that the Renminbi (RMB) was fairly valued by 2011. In contrast, the RMB's value was undervalued in 2005, and overvalued in 2014.

Suggested Citation

  • Yin†Wong Cheung & Menzie Chinn & Xin Nong, 2017. "Estimating currency misalignment using the Penn effect: It is not as simple as it looks," International Finance, Wiley Blackwell, vol. 20(3), pages 222-242, December.
  • Handle: RePEc:bla:intfin:v:20:y:2017:i:3:p:222-242
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    File URL: https://doi.org/10.1111/infi.12113
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Yin-Wong Cheung & Sven Steinkamp & Frank Westermann, 2019. "A Tale of Two Surplus Countries: China and Germany," IEER Working Papers 114, Institute of Empirical Economic Research, Osnabrueck University.
    2. repec:pal:compes:v:61:y:2019:i:3:d:10.1057_s41294-019-00093-0 is not listed on IDEAS
    3. Yin-Wong Cheung & Wenhao Wang, 2019. "A Jackknife Model Averaging Analysis of RMB Misalignment Estimates," IEER Working Papers 116, Institute of Empirical Economic Research, Osnabrueck University.
    4. Luis M. Cubeddu & Signe Krogstrup & Gustavo Adler & Pau Rabanal & Mai Chi Dao & Swarnali A Hannan & Luciana Juvenal & Carolina Osorio Buitron & Cyril Rebillard & Daniel Garcia-Macia & Callum Jones & J, 2019. "The External Balance Assessment Methodology: 2018 Update," IMF Working Papers 19/65, International Monetary Fund.
    5. repec:eee:jimfin:v:77:y:2017:i:c:p:18-38 is not listed on IDEAS
    6. Yin-Wong Cheung & Shi He, 2019. "Truths and Myths About RMB Misalignment: A Meta-analysis," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(3), pages 464-492, September.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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