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China'S Equilibrium Real Exchange Rate: A Counterfactual Analysis

  • Rod Tyers
  • Iain Bain
  • Yongxiang Bu

China's 'equilibrium' real effective exchange rate is explored using an adaptation of the Devarajan-Lewis-Robinson three-good general equilibrium model under a variety of assumptions about the balance of trade. The absence of secondary indices of import and export prices necessitates their construction from trade data. Some undervaluation is suggested in the lead-up to and during the financial crisis, due in part to an extraordinary accumulation of foreign reserves following exchange rate integration in 1994. If, instead, China had run a more typical trade balance prior to the crisis its real effective exchange rate would have been higher by about a tenth. Copyright 2008 The Authors Journal compilation 2008 Blackwell Publishing Ltd

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Article provided by Wiley Blackwell in its journal Pacific Economic Review.

Volume (Year): 13 (2008)
Issue (Month): 1 (02)
Pages: 17-39

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Handle: RePEc:bla:pacecr:v:13:y:2008:i:1:p:17-39
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  1. Shang-Jin Wei & Eswar Prasad, 2005. "The Chinese Approach to Capital Inflows; Patterns and Possible Explanations," IMF Working Papers 05/79, International Monetary Fund.
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