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New Estimates of the Equilibrium Exchange Rate: The Case for the Chinese Renminbi

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  • Kiyotaka Sato
  • Junko Shimizu
  • Nagendra Shrestha
  • Zhaoyong Zhang

Abstract

We estimate the equilibrium exchange rate (EER) of the Chinese renminbi (RMB) vis-a-vis the U.S. dollar from 1992 to 2008. In contrast to the recent empirical studies on the EER employing a large cross-country analysis, we focus on the supply side real factors in estimating the EER by extending the Yoshikawa (1990) model. To better reflect China's processing exports in the context of growing intra-regional trade in Asia, we incorporate in the empirical analysis the source country breakdown data on import prices and input coefficients of intermediate inputs by constructing an annual new International Input-Output (IIO) table for the period from 1992 to 2008. The results show that the EER of Chinese RMB appreciates sharply from 2005 to 2008, suggesting that the current RMB exchange rate has been substantially undervalued and should be revalued by 65 percent from the year 2000 level. Such sharp appreciation of the EER corresponds to the dramatic increase in China's current account surplus from the mid-2000s, especially against the United States, which is ascribed to the significant improvement of both labor and intermediate input coefficients in China.
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  • Kiyotaka Sato & Junko Shimizu & Nagendra Shrestha & Zhaoyong Zhang, 2012. "New Estimates of the Equilibrium Exchange Rate: The Case for the Chinese Renminbi," The World Economy, Wiley Blackwell, vol. 35(4), pages 419-443, April.
    • Handle: RePEc:bla:worlde:v:35:y:2012:i:4:p:419-443
    DOI: j.1467-9701.2012.01444.x
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    Cited by:

    1. Vaseem Akram & Badri Narayan Rath, 2018. "Exchange rate misalignment and total factor productivity growth in case of emerging market economies," International Economics and Economic Policy, Springer, vol. 15(3), pages 547-564, July.
    2. Eddy Bekkers & Joseph Francois, 2014. "Bilateral Exchange Rates and Jobs," Review of International Economics, Wiley Blackwell, vol. 22(2), pages 275-298, May.
    3. Wang, Gang-Jin & Xie, Chi, 2013. "Cross-correlations between Renminbi and four major currencies in the Renminbi currency basket," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(6), pages 1418-1428.
    4. 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.
    5. Yana Valeryevna Dyomina, 2014. "Balance of Payments of East Asian Countries: Impact of the Coordinated Monetary Policy," Spatial Economics=Prostranstvennaya Ekonomika, Economic Research Institute, Far Eastern Branch, Russian Academy of Sciences (Khabarovsk, Russia), issue 1, pages 138-152.
    6. Fukao, Kyoji & 深尾, 京司 & Yuan, Tangjun, 2012. "China'S Economic Growth, Structural Change And The Lewisian Turning Point," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 53(2), pages 147-176, December.
    7. Zhibai Zhang & Xinyue Zou, 2013. "The Ratio Model and its Application: A Revisit," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 3(6), pages 1-4.
    8. Mario Alberto Lagunes Perez & Hector Hugo Perez Villarreal, 2016. "Exchange Rate And Determinants Of Exports In Periods Of Financial Volatility In The North America Free Trade Agreement Zone,Tipo De Cambio Y Determinantes De Las Exportaciones En Periodos De Volatilid," Revista Internacional Administracion & Finanzas, The Institute for Business and Finance Research, vol. 9(2), pages 61-71.
    9. Zhang, Zhibai & Chen, Langnan, 2014. "A new assessment of the Chinese RMB exchange rate," China Economic Review, Elsevier, vol. 30(C), pages 113-122.

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