Forecasting the Chinese Yuan-US Dollar Exchange Rate under the New Chinese Exchange Rate Regime
Two models are specified, estimated, and used to generate out-of-sample forecasts over the period since China announced a shift in exchange rate policy from a simple peg to the US dollar to a basket peg. The results show that the model that is based on a crawling peg is far superior to the model that is based on a basket peg. It is also shown that trading the Chinese yuan versus the US dollar is more profitable than otherwise when trading is based on the assumption of a crawling peg, in which case buy and hold is the best strategy. It is concluded that China must be using a crawling peg, which is not good news for the US but may be good news for foreign exchange traders.
Volume (Year): 7 (2008)
Issue (Month): 1 (April)
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- Nouriel Roubini, 2007. "Why China Should Abandon Its Dollar Peg," International Finance, Wiley Blackwell, vol. 10(1), pages 71-89, 03.
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- Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 216-27, June.
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