In Search of an Optimal Strategy for Yuan’s Real Revaluation
International commentators seem to have a consensus view that the Chinese yuan is substantially undervalued and the Chinese monetary authority must take speedy actions to redress the currency misalignment by rapid nominal revaluation. This paper argues for a gradualist but comprehensive strategy for adjusting RMB’s exchange rate. Taking into consideration of the facts that the yuan’s undervaluation is caused by an array of domestic and international factors and the Chinese central bank cannot effectively invest its growing holdings of foreign reserves, we develop a framework to provide a theoretical underpinning for the optimal strategy for renminbi’s gradual revaluation. With this strategy, the renminbi undervaluation problem is gradually redressed through a combination of nominal appreciation and higher inflation plus some other structural and macroeconomic policies. This strategy can also allow absorb external imbalances hence strengthening the foundation of China’s long-term growth.
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"The overvaluation of Renminbi undervaluation,"
Journal of International Money and Finance,
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- Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2007. "The Overvaluation of Renminbi Undervaluation," NBER Working Papers 12850, National Bureau of Economic Research, Inc.
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- Jinzhao Chen, 2009. "Beyond Cheap Talks: Assessing the Undervaluation of the Chinese Currency Between 1994 and 2007," Economie Internationale, CEPII research center, issue 119, pages 47-82.
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- Meixing Dai, 2006. "Inflation-targeting under a Managed Exchange Rate: the Case of the Chinese Central Bank," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 4(3), pages 199-219.
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