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Yuan Real Exchange Rate Undervaluation, 1997-2006. How Much, How Often? Not Much, Not Often

Author

Listed:
  • Jeff Chen

    ()

  • Wende Deng
  • David Kemme

    ()

Abstract

Yuan real effective exchange rate misalignment is esitimated in a behavioral equilibrium exchange rate (BEER) model for the period 1997 to third quarter 2007. Using the Beveridge-Nelson decomposition a vector error correction model (VECM) of the exchange rate as a function of macroeconomic fundamentals, including government expenditures, economic openness, the balance of trade surplus, and net foreign assets, is estimated. We find that the Chinese Yuan has been fluctuating moderately around its long run equilibrium value with undervaluation up to 4% and overvaluation up to 6% at various points in time since 1997. This result is consistent with findings of many of the most recent studies employing alternative econometric methodologies to determine the equilibrium exchange rate. While the Yuan real effective exchange rate has deviated from equilibrium, and it is sticky, taking over five years to correct 50% of the short run misalignment, it does not appear to have been consistently undervalued as has been widely argued.

Suggested Citation

  • Jeff Chen & Wende Deng & David Kemme, 2008. "Yuan Real Exchange Rate Undervaluation, 1997-2006. How Much, How Often? Not Much, Not Often," William Davidson Institute Working Papers Series wp934, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2008-934
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    File URL: http://deepblue.lib.umich.edu/bitstream/2027.42/64348/1/wp934.pdf
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    Cited by:

    1. Bineau, Yannick, 2010. "Renminbi's misalignment: A meta-analysis," Economic Systems, Elsevier, vol. 34(3), pages 259-269, September.

    More about this item

    Keywords

    Chinese Yuan; Exchange Rate; Misalignment; BEER; Behavioral; Cointegration; ARIMA; VECM; FGLS.;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • P33 - Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid

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