The Renminbi Equilibrium Exchange Rate: An Agnostic View

48 Pages Posted: 14 Aug 2006

See all articles by Henri Sterdyniak

Henri Sterdyniak

Observatoire Français des Conjonctures Economiques (OFCE)

Antoine Bouveret

European Securities and Markets Authority

Multiple version iconThere are 2 versions of this paper

Date Written: July 2006

Abstract

The supposed undervaluation of the renminbi has been the subject of intensive academic research over the past few years. Using equilibrium exchange rate models (Purchasing Power Parity, BEER and FEER), many authors have concluded that the renminbi is undervalued by 15 to 30% against the dollar. This article shows that the common view is not that obvious. The models used in the estimation (BEER or FEER) assume that the economy is at full-employment, a strong hypothesis for developing economies such as China, whose unemployed amount to 150 million people. On the contrary, we show that China is facing massive unemployment and if investment depends on expected potential demand (from domestic consumption and foreign demand), then an undervalued exchange rate (by traditional standards) is suited for its policy objectives. Therefore the exchange rate can be analyzed as a policy tool used by the Chinese authorities to pursue their objectives. The exchange rate can be undervalued by traditional standards and in equilibrium compared to the government's policy objectives. This article shows that equilibrium exchange rate theories are not suited for developing countries and therefore the concept of equilibrium exchange rate is highly questionable. The final section analyzes the adoption of a managed float regime by the Popular Bank of China and discusses the delicate issue of the best exchange rate regime for China.

Keywords: Equilibrium Exchange Rate, Exchange Rate Management, China Economic Strategy

JEL Classification: F31, F42, O24

Suggested Citation

Sterdyniak, Henri and Bouveret, Antoine, The Renminbi Equilibrium Exchange Rate: An Agnostic View (July 2006). Available at SSRN: https://ssrn.com/abstract=923980 or http://dx.doi.org/10.2139/ssrn.923980

Henri Sterdyniak

Observatoire Français des Conjonctures Economiques (OFCE) ( email )

69 Quai d'Orsay
Paris 75007
France

Antoine Bouveret (Contact Author)

European Securities and Markets Authority ( email )

201-203 rue de Bercy
Paris, IDF 75012
France

HOME PAGE: http://www.esma.europa.eu

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