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The renminbi equilibrium exchange rate: an agnostic view

The alleged undervaluation of the renminbi has been the subject of intensive academic research over the past few years. Using equilibrium exchange rate models many authors have concluded that the renminbi is undervalued by 15 to 30% against the US dollar. Yet China has been experiencing strong economic growth for a decade and does not seem to suffer from the supposed misalignment of its exchange rate, with low inflation rate and current account surpluses. The estimations assume that the economy is at full-employment, a strong hypothesis for China, where unemployment amounts to 150 million people. This article claims that a low exchange rate is suited for the objectives of Chinese economic policy. The exchange rate can be undervalued according to traditional models and in equilibrium compared to the government’s policy objectives as shown by a theoretical model.

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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2006-13.

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Date of creation: 2006
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Handle: RePEc:fce:doctra:0613
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  15. 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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  20. 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.
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  25. Giles, John & Park, Albert & Zhang, Juwei, 2005. "What is China's true unemployment rate?," China Economic Review, Elsevier, vol. 16(2), pages 149-170.
  26. Agnès Bénassy-Quéré & Pascale Duran-Vigneron & Amina Lahrèche-Revil & Mignon, Valerie, 2004. "Burden Sharing and Exchange-Rate Misalignments within the Group of Twenty," Working Papers 2004-13, CEPII research center.
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