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Beyond Cheap Talks: Assessing the Undervaluation of the Chinese Currency Between 1994 and 2007

  • Jinzhao Chen

Relying on new cointegration framework with structural breaks in the deterministic trend, this article employs the behavioral equilibrium exchange rate (BEER) approach to estimate the equilibrium real exchange rate of Renminbi (RMB) and exchange rate misalignment in China from 1994Q1 to 2007Q4. The main findings of the article are that RMB was overvalued during the Asian Financial crisis and during the period of 2001-2002. It was undervalued to a mild extent only during recent period from 2003 to 2005, except at the beginning of the sample; furthermore, slight overvaluations have appeared after the reform of exchange rate regime in 2005. Interpretations are given to shed some light on these movements.

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Article provided by CEPII research center in its journal Economie Internationale.

Volume (Year): (2009)
Issue (Month): 119 ()
Pages: 47-82

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Handle: RePEc:cii:cepiei:2009-3tc
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  1. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
  2. Coudert, Virginie & Couharde, Cecile, 2007. "Real equilibrium exchange rate in China is the renminbi undervalued?," Journal of Asian Economics, Elsevier, vol. 18(4), pages 568-594, August.
  3. Morris Goldstein, 2004. "Adjusting China's Exchange Rate Policies," Working Paper Series WP04-1, Peterson Institute for International Economics.
  4. Funke, Michael & Rahn, Jörg, 2004. "Just how undervalued is the Chinese renminbi?," BOFIT Discussion Papers 14/2004, Bank of Finland, Institute for Economies in Transition.
  5. Clostermann, Jörg & Schnatz, Bernd, 2000. "The determinants of the euro-dollar exchange rate: synthetic fundamentals and a non-existing currency," Discussion Paper Series 1: Economic Studies 2000,02, Deutsche Bundesbank, Research Centre.
  6. Frankel, Jeffrey, 2004. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adustment under a Flexible Rate," Working Paper Series rwp04-037, Harvard University, John F. Kennedy School of Government.
  7. Dominique Desruelle & Alessandro Zanello, 1997. "A Primeron the IMF's Information Notice System," IMF Working Papers 97/71, International Monetary Fund.
  8. Eswar Prasad, 2004. "China's Growth and Integration into the World Economy; Prospects and Challenges," IMF Occasional Papers 232, International Monetary Fund.
  9. Baffes, John & Elbadawi, Ibrahim A. & O'Connell, Stephen A., 1997. "Single-equation estimation of the equilibrium real exchange rate," Policy Research Working Paper Series 1800, The World Bank.
  10. Se-Eun Jeong & Jacques Mazier, 2003. "Exchange Rate Regimes and Equilibrium Exchange Rates in East Asia," Revue économique, Presses de Sciences-Po, vol. 54(5), pages 1161-1182.
  11. Ronald MacDonald, 1997. "What Determines Real Exchange Rates? The Long and Short of it," IMF Working Papers 97/21, International Monetary Fund.
  12. repec:cai:recosp:reco_545_0001 is not listed on IDEAS
  13. Zhang, Zhichao, 2001. "Real Exchange Rate Misalignment in China: An Empirical Investigation," Journal of Comparative Economics, Elsevier, vol. 29(1), pages 80-94, March.
  14. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals; A Methodological Comparison of Beers and Feers," IMF Working Papers 98/67, International Monetary Fund.
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