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Estimate of Equilibrium Real Exchange Rate and Misalignment of Chinese Yuan Vis-a-Vis US Dollar


  • Atabani Adi Agya


  • Du Jun



The paper examines the misalignment in equilibrium real exchange rate of Chinese Yuan against US dollar. The data covered the period of 1980-2014, it used Vector Autoregressive model, the variables are not stationary at level and became stationary after first differencing and there were three co-integration vectors. The long run coefficients have expected sign except for interest rate differential and are significant at 5 percent significance level. The speed of adjustment of real exchange rate to it equilibrium indicated that the disequilibrium in the last period are corrected by 87 percent each year and highly significant. The Yuan was overvalued by 4 percent, from 1981-1990 and in1990 it was undervalue about 4 percent and move back to equilibrium, the highest overvaluation was in 1993 up to 13 percent from equilibrium value and undervalue in 1994 by 14 percent which was the highest level of undervaluation, between 1996 to 2005 the Yuan was relatively within it equilibrium and slightly over value to 3.8 percent in 2008 back to long time path in 2011 and relatively undervalue by 1-3 percent since 2012, in general the Yuan is not substantially undervalue as claims in some studies both theoretical and empirical estimation and the movement in the exchange rate are consistent with economic fundamental of China.

Suggested Citation

  • Atabani Adi Agya & Du Jun, 2015. "Estimate of Equilibrium Real Exchange Rate and Misalignment of Chinese Yuan Vis-a-Vis US Dollar," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 1(3), pages 148-165, September.
  • Handle: RePEc:khe:scajes:v:1:y:2015:i:3:p:148-165

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    References listed on IDEAS

    1. Jeff Chen & Wende Deng & David Kemme, 2008. "Yuan Real Exchange Rate Undervaluation, 1997-2006. How Much, How Often? Not Much, Not Often," William Davidson Institute Working Papers Series wp934, William Davidson Institute at the University of Michigan.
    2. Sims, Christopher A, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," American Economic Review, American Economic Association, vol. 70(2), pages 250-257, May.
    3. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    4. Zhichao Zhang, 2002. "Real Exchange Rate Behaviour Under Hong Kong'S Linked Exchange Rate System: An Empirical Investigation," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(01), pages 55-78.
    5. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    6. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    7. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    8. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
    9. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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    Cited by:

    1. Yin-Wong Cheung & Shi He, 2019. "Truths and Myths About RMB Misalignment: A Meta-analysis," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(3), pages 464-492, September.

    More about this item


    Equilibrium Exchange Rate; Economic Fundamental; Misalignment; Yuan Vis-a-Vis US Dollar;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics


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