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China’s Equilibrium Real Exchange Rate: A Counterfactual Analysis

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  • Rod Tyers

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  • Yongxiang Bu
  • Ian Bain

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Abstract

China’s maintenance of a de facto peg against the US dollar during and following the Asian financial crisis caused a realignment of exchange rates in the Asian region. This paper explores the “equilibrium” level of China’s real effective rate in the lead-up to, during and following that crisis. An adaptation of the Devarajan-Lewis-Robinson three-good general equilibrium model is employed to estimate time paths of the equilibrium real effective exchange rate under a variety of assumptions about the balance of trade. Key requirements of the model are indices of import and export prices in time series. Since these are unavailable from secondary sources they are here constructed from trade data. The results suggest that, while there is no clear evidence of undervaluation as of 2004, China’s real effective exchange rate was on the low side in the lead-up to and during the crisis, due in part to an extraordinary rate of accumulation of foreign reserves and an associated trade surplus following the integration of its hitherto multiple exchange rates in 1994. If, instead, China had run a more typical trade deficit, say amounting to 10 per cent of export revenue or 1.5 per cent of GDP, it is estimated that China’s real effective exchange rate would have been higher by about a tenth prior to the crisis.

Suggested Citation

  • Rod Tyers & Yongxiang Bu & Ian Bain, 2006. "China’s Equilibrium Real Exchange Rate: A Counterfactual Analysis," ANU Working Papers in Economics and Econometrics 2006-466, Australian National University, College of Business and Economics, School of Economics.
  • Handle: RePEc:acb:cbeeco:2006-466
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    File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp466.pdf
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    References listed on IDEAS

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    11. 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.
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    14. John G. Fernald & Oliver D. Babson, 1999. "Why has China survived the Asian crisis so well? What risks remain?," International Finance Discussion Papers 633, Board of Governors of the Federal Reserve System (U.S.).
    15. Ivan Roberts & Rod Tyers, 2003. "China's Exchange Rate Policy: The Case for Greater Flexibility," Asian Economic Journal, East Asian Economic Association, vol. 17(2), pages 155-184, June.
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    Citations

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    Cited by:

    1. Zhang, Yin & Wan, Guanghua, 2007. "What accounts for China's trade balance dynamics?," Journal of Policy Modeling, Elsevier, vol. 29(6), pages 821-837.
    2. Tyers, Rod, 2015. "International effects of China's rise and transition: Neoclassical and Keynesian perspectives," Journal of Asian Economics, Elsevier, vol. 37(C), pages 1-19.
    3. repec:bla:worlde:v:39:y:2016:i:11:p:1674-1702 is not listed on IDEAS
    4. Tyers, Rod & Golley, Jane, 2008. "China’s Real Exchange Rate Puzzle," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 23, pages 547-574.
    5. repec:bla:apacel:v:31:y:2017:i:1:p:39-52 is not listed on IDEAS
    6. Rod Tyers & Ying Zhang, 2011. "Appreciating the Renminbi," The World Economy, Wiley Blackwell, vol. 34(2), pages 265-297, February.
    7. Das, Dilip K., 2009. "The evolution of renminbi yuan and the protracted debate on its undervaluation: An integrated review," Journal of Asian Economics, Elsevier, vol. 20(5), pages 570-579, September.
    8. Bernd Schnatz, 2011. "Global Imbalances And The Pretence Of Knowing Fundamental Equilibrium Exchange Rates," Pacific Economic Review, Wiley Blackwell, vol. 16(5), pages 604-615, December.
    9. Rod Tyers, 2016. "China and Global Macroeconomic Interdependence," The World Economy, Wiley Blackwell, vol. 39(11), pages 1674-1702, November.
    10. Prayudhi Azwar & Rod Tyers, 2015. "Indonesian Macro Policy through Two Crises," Economics Discussion / Working Papers 15-16, The University of Western Australia, Department of Economics.
    11. Zhang, Yin & Wan, Guanghua, 2008. "Correcting China's trade imbalance: Monetary means will not suffice," Journal of Policy Modeling, Elsevier, vol. 30(3), pages 505-521.
    12. repec:eee:asieco:v:54:y:2018:i:c:p:39-52 is not listed on IDEAS
    13. 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.
    14. Rod Tyers & Jane Golley, 2007. "China’s Real Exchange Rate," ANU Working Papers in Economics and Econometrics 2007-479, Australian National University, College of Business and Economics, School of Economics.
    15. Rod Tyers & Iain Bain, 2008. "American and European Financial Shocks: Implications for Chinese Economic Performance," ANU Working Papers in Economics and Econometrics 2008-491, Australian National University, College of Business and Economics, School of Economics.
    16. Korhonen, Iikka & Ritola, Maria, 2009. "Renminbi misaligned : Results from meta-regressions," BOFIT Discussion Papers 13/2009, Bank of Finland, Institute for Economies in Transition.
    17. Rod Tyers & Ying Zhang, 2014. "Real exchange rate determination and the China puzzle," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 28(2), pages 1-32, November.

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