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The Optimal Path of the Chinese Renminbi

  • Dupuy, Philippe
  • Carlotti, Jean-Etienne

This paper provides evidence on the consistency of the determination of the Chinese real effective exchange rate (REER) over time. Especially, we validate coin- tegration between the REER and a set of fundamentals using recent developments in model selection. Error correction model (ECM) path dependence in model se- lection is addressed by using the General-To-Specific (GETS) approach enabling us to obtain empirically constant and encompassing ECM. As inference in finite sam- ples is commonly of concern, statistics' distributional properties for cointegration tests are estimated by Monte Carlo simulations. The final specification of the model is compatible with the natural real exchange rate of Stein (1994). We study the implications of our findings in terms of foreign exchange policy.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26107.

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Date of creation: Feb 2010
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Handle: RePEc:pra:mprapa:26107
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  1. Michael Funke & Jörg Rahn, 2005. "Just how Undervalued is the Chinese Renminbi," Quantitative Macroeconomics Working Papers 20504, Hamburg University, Department of Economics.
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  8. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17.
  9. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
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  11. Jeffrey Frankel, 2005. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate," NBER Working Papers 11274, National Bureau of Economic Research, Inc.
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  13. Charles Engel & Nelson C. Mark & Kenneth D. West, 2008. "Exchange Rate Models Are Not As Bad As You Think," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 381-441 National Bureau of Economic Research, Inc.
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  17. Michael L. Mussa, 1984. "The Theory of Exchange Rate Determination," NBER Chapters, in: Exchange Rate Theory and Practice, pages 13-78 National Bureau of Economic Research, Inc.
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