IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v81y2025ics1544612325007408.html

RMB equilibrium exchange rate and misalignment: Insights from the CN-NATREX Model

Author

Listed:
  • Wei, Wei
  • Tang, Zefeng

Abstract

This study builds a RMB natural equilibrium exchange rate (CN-NATREX) model to evaluate the impact of intensifying international competition on the RMB’s NATREX and misalignment. Using China’s data, we confirm the model’s robustness, obtaining dynamics of equilibrium and competition. Results indicate that the RMB underwent an adjustment period from 2013 to 2014. Before this period, the RMB was undervalued; subsequently, it became significantly overvalued, with a misalignment forming a left-tailed inverted U. The findings strengthen the NATREX framework, offering an innovative approach for exchange rate policy amid complex global economic dynamics.

Suggested Citation

  • Wei, Wei & Tang, Zefeng, 2025. "RMB equilibrium exchange rate and misalignment: Insights from the CN-NATREX Model," Finance Research Letters, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:finlet:v:81:y:2025:i:c:s1544612325007408
    DOI: 10.1016/j.frl.2025.107481
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612325007408
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2025.107481?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Mohammed Amine Lezar, 2023. "Real Exchange Rate of Moroccan Currency: Appreciated or Depreciated?," International Journal of Economics and Financial Issues, Econjournals, vol. 13(1), pages 89-101, January.
    2. Banerjee, Krittika & Goyal, Ashima, 2021. "Behavioural​ equilibrium real exchange rates and misalignments: Evidence from large emerging markets," Economic Analysis and Policy, Elsevier, vol. 70(C), pages 414-436.
    3. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2023. "Exchange rate misalignment and external imbalances: What is the optimal monetary policy response?," Journal of International Economics, Elsevier, vol. 144(C).
    4. Rohan Kekre & Moritz Lenel, 2024. "Exchange Rates, Natural Rates, and the Price of Risk," NBER Working Papers 32976, National Bureau of Economic Research, Inc.
    5. Yuming Cui & Lian Liu & Ke Peng, 2024. "International competitiveness and currency internationalization: an application to RMB internationalization," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 29(2), pages 588-611, April.
    6. Hossain, Ashrafee T. & Masum, Abdullah-Al & Saadi, Samir, 2024. "The impact of geopolitical risks on foreign exchange markets: Evidence from the Russia–Ukraine war," Finance Research Letters, Elsevier, vol. 59(C).
    7. Yanping Ma & Qian Wei & Xiang Gao, 2024. "The Impact of Political Risks on Financial Markets: Evidence from a Stock Price Crash Perspective," IJFS, MDPI, vol. 12(2), pages 1-16, May.
    8. Yuan Li & Jin Chen, 2025. "Charting the RMB's Development as a Global Currency Anchor: An Empirical Analysis," Review of Development Economics, Wiley Blackwell, vol. 29(4), pages 2126-2143, November.
    9. Ramos-Herrera, María del Carmen & Sosvilla-Rivero, Simón, 2023. "Economic growth and deviations from the equilibrium exchange rate," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 764-786.
    10. Fengxian Chen & Tianruo Hao, 2024. "The degree of RMB as an international anchor currency and its driving factors: an exchange rate perspective," Applied Economics, Taylor & Francis Journals, vol. 56(4), pages 462-482, January.
    11. You, Kefei & Sarantis, Nicholas, 2012. "Structural breaks and the equilibrium real effective exchange rate of China: A NATREX approach," China Economic Review, Elsevier, vol. 23(4), pages 1146-1163.
    12. Allan G. Gruchy, 1985. "Corporate Concentration and the Restructuring of the American Economy," Journal of Economic Issues, Taylor & Francis Journals, vol. 19(2), pages 429-439, June.
    13. Ca’ Zorzi, Michele & Rubaszek, Michał, 2023. "How many fundamentals should we include in the behavioral equilibrium exchange rate model?," Economic Modelling, Elsevier, vol. 118(C).
    14. Zennati, Oussama & Nechba, Zineb Bennis & Chtouki, Zakaria, 2025. "Asymmetric impact of migrants’ remittances on real effective exchange rate in Morocco," Journal of Policy Modeling, Elsevier, vol. 47(3), pages 588-606.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Prabheesh, K.P. & Prakash, Branesh & Vuniivi, Viliame, 2023. "Assessment of Fiji’s exchange rate," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1282-1305.
    2. Yan, Xianglin & Piao, Longguo, 2025. "The effect of global geopolitical risks on trade openness," International Review of Economics & Finance, Elsevier, vol. 102(C).
    3. Cheng Wang & Chuwen Wang & Shirong Zeng & Jianguo Liu & Changjun Jiang, 2025. "Advanced simulation paradigm of human behaviour unveils complex financial systemic projection," Papers 2503.20787, arXiv.org, revised May 2025.
    4. Abakah, Emmanuel Joel Aikins & Abdullah, Mohammad & Akinsomi, Omokolade & Tiwari, Aviral Kumar, 2025. "Geopolitical risk and real estate stock crash," Finance Research Letters, Elsevier, vol. 80(C).
    5. Iqbal, Javed & Mahmood, Fatima & Nosheen, Misbah & Wohar, Mark, 2023. "The asymmetric impact of exchange rate misalignment on economic growth of India: An application of Hodrick–Prescott filter technique," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 809-823.
    6. Rughoo, Aarti & You, Kefei, 2016. "Asian financial integration: Global or regional? Evidence from money and bond markets," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 419-434.
    7. Jean-François Hoarau, 2013. "Un modèle NATREX synthétique pour une petite économie « développée » ouverte contrainte sur les marchés internationaux de capitaux," L'Actualité Economique, Société Canadienne de Science Economique, vol. 89(4), pages 259-303.
    8. Chuyao Deng & Yang Liu & Doudou Gu, 2022. "Can rising labor costs boost private sector R&D investment? : Evidence from a survey of Chinese private firms," PLOS ONE, Public Library of Science, vol. 17(8), pages 1-20, August.
    9. Bernoth, Kerstin & Herwartz, Helmut & Trienens, Lasse, 2024. "Interest Rates, Convenience Yields and Inflation Expectations: Drivers of US Dollar Exchange Rates," VfS Annual Conference 2024 (Berlin): Upcoming Labor Market Challenges 302351, Verein für Socialpolitik / German Economic Association, revised 2024.
    10. Maurice Obstfeld, 2025. "Natural and Neutral Real Interest Rates: Past and Future," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 73(2), pages 339-392, June.
    11. Darmanto Darmanto & Darti Isnani & Astutik Suci & Nurjannah Nurjannah, 2026. "Value At Risk Estimation Using Markov-Switching Garch-Evt (Pot) Model: A Geopolitical Risk Perspective From The Iran-Israel Conflict," Economics, Sciendo, vol. 14(1), pages 1-23.
    12. López Prol, Javier, 2025. "Taiwan’s stock market resilience to increasing geopolitical risk," Finance Research Letters, Elsevier, vol. 80(C).
    13. Xie, Oliver, 2024. "Financial Hedging and Optimal Currency of Invoicing," SocArXiv v8zdk, Center for Open Science.
    14. repec:osf:socarx:v8zdk_v1 is not listed on IDEAS
    15. Caporale, Guglielmo Maria & Gil-Alana, Luis A. & You, Kefei, 2018. "Exchange rate linkages between the ASEAN currencies, the US dollar and the Chinese RMB," Research in International Business and Finance, Elsevier, vol. 44(C), pages 227-238.
    16. Liu, Mengyue & Wei, Jiajia & Gao, Wang & Jiang, Yuanyuan & Sun, Yadong, 2025. "Multiscale dynamic linkages of China's financial markets under exchange rate shocks: An MJMD approach," International Review of Financial Analysis, Elsevier, vol. 108(PA).
    17. Acharya, Sushant & Challe, Edouard, 2025. "Reprint of: Inequality and optimal monetary policy in the open economy," Journal of International Economics, Elsevier, vol. 156(C).
    18. Sangyup Choi & Chaewon Kim & Inhwan So, 2026. "Demographic Changes and Real Exchange Rates: Future of an Aging Economy," Working papers 2026rwp-285, Yonsei University, Yonsei Economics Research Institute.
    19. Guillermo Hausmann-Guil, 2025. "Solving DSGE models with incomplete markets by perturbation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 57, July.
    20. repec:rnp:ppaper:mak13 is not listed on IDEAS
    21. Emile A. Marin & Sanjay R. Singh, 2025. "Incomplete Markets and Exchange Rates," Working Paper Series 2025-11, Federal Reserve Bank of San Francisco.
    22. Tehreem Fatima & Asif Razzaq & Xuan‐Hoa Nghiem & Muhammad Saeed Meo, 2025. "How environmental policy stringency, green investment, and renewable energy contribute to environmental pollution and load capacity factor in G11 countries?," Natural Resources Forum, Blackwell Publishing, vol. 49(4), pages 3967-3983, November.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:81:y:2025:i:c:s1544612325007408. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.