A Darwinian Perspective on 'Exchange Rate Undervaluation'

66 Pages Posted: 4 Apr 2012

See all articles by Qingyuang Du

Qingyuang Du

Monash University

Shang-Jin Wei

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: March 2012

Abstract

Though the real exchange rate is a key price for most economies, our understanding of its determinants is still incomplete. This paper studies the implications of status competition in the marriage market for the real exchange rate. In theory, a rise in the sex ratio (increasing relative surplus of men) can generate a decline in the real exchange rate (RER) through both a savings channel and an effective labor supply channel. The effects can be quantitatively large if the biological desire for a marriage partner is strong. Empirically, we show that within China, those regions with a faster increase in the sex ratio also exhibit a faster decline in the RER (the relative price of nontradables). Furthermore, across countries, those with a high sex ratio tend to have a low real exchange rate, beyond what can be explained by the Balassa-Samuelson effect, financial underdevelopment, dependence ratio, and exchange rate regime classifications. As an application, the estimation suggests that these structural factors can account for the Chinese exchange rate almost completely.

Keywords: currency manipulation, equilibrium real exchange rate, surplus men

JEL Classification: F3, F4, J1, J7

Suggested Citation

Du, Qingyuang and Wei, Shang-Jin, A Darwinian Perspective on 'Exchange Rate Undervaluation' (March 2012). CEPR Discussion Paper No. DP8872, Available at SSRN: https://ssrn.com/abstract=2034090

Qingyuang Du (Contact Author)

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Shang-Jin Wei

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom