Real Equilibrium Exchange Rate in China. Is the Renminbi Undervalued?

Is the Chinese Currency Substantially Misaligned to Warrant Further Appreciation?

“…The particularly large and persistently negative misalignment prior to 2008 found in the GDP-based series agrees broadly with the findings of substantial undervaluation from several studies using relative income as the main explanatory variable for REER (e.g. Coudert and Couharde, 2005;Frankel, 2005;MacDonald and Dias, 2007;Cheung et al, 2009), in spite of the numerous differences among these studies concerning the choice of model specification, data sample and estimation method. Remarkably, the sharp turning of the series into overvaluation since 2008 confirms the finding reported by Cheung et al (2009) that there is a 14.2 per cent overvaluation at 2008Q3 when they apply the cointegration technique to an update data sample.…”

“…However, there is no conclusive evidence showing that the RMB is indeed substantially undervalued. Although the majority of empirical studies find the RMB undervalued, the range of estimated degrees of undervaluation is too wide to be credible, spanning from zero to over 50 per cent in terms of the real exchange rate (RER) or real effective exchange rate (REER); The figures go even larger when the RMB to USD bilateral rate is used (see Table 14 in Coudert and Couharde (2005), Table 4.1 in Cline and Williamson (2008) for summaries of the studies during 2000-07, and Table 1 for a summary of post-2007 studies).…”

China's Changing Trade Elasticities

“…In addition, certain methodologies used to compute the underlying or equilibrium exchange rate critically depend on stable trade elasticities. For example, in the macroeconomic-balance approach, price elasticities of exports and imports are used to determine the adjustment in the real effective exchange rate needed to close the gap between the underlying current account balance of a country and its equilibrium level, to uncover the degree to which the exchange rate is misaligned (Goldstein, 2004;Coudert and Couharde, 2007;Wang, 2004).…”

Assessing the Equilibrium Exchange Rate of the Malaysian Ringgit: A Comparison of Alternative Approaches

“…Empirical applications of the framework to emerging and developing countries are still pretty rare. Coudert and Couharde (2005) apply the model to the Chinese renminbi. They obtain the underlying current account by correcting the observed current account for lagged exchange rate changes and output gaps at home and in the trading partner countries.…”