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China'S Equilibrium Real Exchange Rate: A Counterfactual Analysis

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  • Rod Tyers
  • Iain Bain
  • Yongxiang Bu

Abstract

. 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.

Suggested Citation

  • Rod Tyers & Iain Bain & Yongxiang Bu, 2008. "China'S Equilibrium Real Exchange Rate: A Counterfactual Analysis," Pacific Economic Review, Wiley Blackwell, vol. 13(1), pages 17-39, February.
    • Handle: RePEc:bla:pacecr:v:13:y:2008:i:1:p:17-39
    DOI: 10.1111/j.1468-0106.2007.00387.x
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    Cited by:

    1. Zhang, Yin & Wan, Guanghua, 2007. "What accounts for China's trade balance dynamics?," Journal of Policy Modeling, Elsevier, vol. 29(6), pages 821-837.
    2. Dosse Toulaboe, 2017. "Real exchange rate misalignment of Asian currencies," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 31(1), pages 39-52, May.
    3. Rod Tyers, 2016. "China and Global Macroeconomic Interdependence," The World Economy, Wiley Blackwell, vol. 39(11), pages 1674-1702, November.
    4. Tyers, Rod & Golley, Jane, 2008. "China’s Real Exchange Rate Puzzle," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 23, pages 547-574.
    5. repec:zbw:bofitp:2009_013 is not listed on IDEAS
    6. Rod Tyers & Ying Zhang, 2011. "Appreciating the Renminbi," The World Economy, Wiley Blackwell, vol. 34(2), pages 265-297, February.
    7. Tyers, Rod, 2015. "International effects of China's rise and transition: Neoclassical and Keynesian perspectives," Journal of Asian Economics, Elsevier, vol. 37(C), pages 1-19.
    8. Zhang, Yin & Wan, Guanghua, 2008. "Correcting China's trade imbalance: Monetary means will not suffice," Journal of Policy Modeling, Elsevier, vol. 30(3), pages 505-521.
    9. Prayudhi Azwar & Rod Tyers, 2015. "Indonesian Macro Policy through Two Crises," CAMA Working Papers 2015-16, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    10. Rod Tyers & Iain Bain, 2008. "American and European Financial Shocks: Implications for Chinese Economic Performance," ANU Working Papers in Economics and Econometrics 2008-491, Australian National University, College of Business and Economics, School of Economics.
    11. Steven Pennings & Rod Tyers, 2008. "Increasing Returns, Financial Capital Mobility and Real Exchange Rate Dynamics," The Economic Record, The Economic Society of Australia, vol. 84(s1), pages 141-158, September.
    12. Korhonen, Iikka & Ritola, Maria, 2009. "Renminbi misaligned : Results from meta-regressions," BOFIT Discussion Papers 13/2009, Bank of Finland, Institute for Economies in Transition.
    13. Bernd Schnatz, 2011. "Global Imbalances And The Pretence Of Knowing Fundamental Equilibrium Exchange Rates," Pacific Economic Review, Wiley Blackwell, vol. 16(5), pages 604-615, December.
    14. Jakub Borowski & Adam Czerniak & Krystian Jaworski, 2014. "The quest for determinants of Chinese exchange rate policy," Bank i Kredyt, Narodowy Bank Polski, vol. 45(5), pages 407�432-4.
    15. Korhonen, Iikka & Ritola, Maria, 2009. "Renminbi misaligned: Results from meta-regressions," BOFIT Discussion Papers 13/2009, Bank of Finland Institute for Emerging Economies (BOFIT).
    16. Rod Tyers & Ying Zhang, 2014. "Real exchange rate determination and the China puzzle," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 28(2), pages 1-32, November.
    17. Das, Dilip K., 2009. "The evolution of renminbi yuan and the protracted debate on its undervaluation: An integrated review," Journal of Asian Economics, Elsevier, vol. 20(5), pages 570-579, September.
    18. Hiroyuki Imai, 2020. "Was the Balassa–Samuelson Effect Small? Uncaptured Quality Improvements and Japan’s Real Exchange Rate Appreciation, 1956–1970," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(4), pages 632-660, December.
    19. Imai, Hiroyuki, 2018. "China’s rapid growth and real exchange rate appreciation: Measuring the Balassa-Samuelson effect," Journal of Asian Economics, Elsevier, vol. 54(C), pages 39-52.
    20. Rod Tyers & Jane Golley, 2007. "China’s Real Exchange Rate," ANU Working Papers in Economics and Econometrics 2007-479, Australian National University, College of Business and Economics, School of Economics.

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