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Estimating Currency Misalignment Using the Penn Effect: It’s Not as Simple As It Looks

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  • Yin-Wong Cheung
  • Menzie Chinn
  • Xin Nong

Abstract

We investigate the strength of the Penn effect in the most recent version of the Penn World Tables (PWTs). We find that the earlier findings of a Penn effect are confirmed, but that there is some evidence for nonlinearity. Developed and developing countries display different types of nonlinear behaviors. The nonlinear behaviors are likely attributable to differences across countries and do not change when additional control variables are added. We confirm earlier findings of large RMB misalignment in the mid-2000’s, but find that by 2011, the RMB seems near equilibrium. While the Penn effect is quite robust across datasets, estimated misalignment can noticeably change from a linear to a nonlinear specification, and from dataset to dataset.

Suggested Citation

  • Yin-Wong Cheung & Menzie Chinn & Xin Nong, 2016. "Estimating Currency Misalignment Using the Penn Effect: It’s Not as Simple As It Looks," NBER Working Papers 22539, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22539
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    4. Ms. Carolina Osorio Buitron & Mr. Mauricio Vargas & Rui Mano & Mr. Luca A Ricci, 2019. "The Level REER model in the External Balance Assessment (EBA) Methodology," IMF Working Papers 2019/192, International Monetary Fund.
    5. Almås, Ingvild & Grewal, Mandeep & Hvide, Marielle & Ugurlu, Serhat, 2017. "The PPP approach revisited: A study of RMB valuation against the USD," Journal of International Money and Finance, Elsevier, vol. 77(C), pages 18-38.
    6. 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.
    7. Mr. Pau Rabanal & Luciana Juvenal & Gustavo Adler & Ms. Carolina Osorio Buitron & Jair Rodriguez & Ms. Nan Li & Mrs. Swarnali A Hannan & Signe Krogstrup & Mai Chi Dao & Mr. Daniel Garcia-Macia & Callu, 2019. "The External Balance Assessment Methodology: 2018 Update," IMF Working Papers 2019/065, International Monetary Fund.
    8. Grabowski, Wojciech & Welfe, Aleksander, 2020. "The Tobit cointegrated vector autoregressive model: An application to the currency market," Economic Modelling, Elsevier, vol. 89(C), pages 88-100.

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    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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