A new assessment of the Chinese RMB exchange rate

- The ratio, Penn effect and behavioral equilibrium exchange rate models are used.
- The statistical indexes and economic meaning are used to generate a better result.
- RMB is proven to be overvalued by about 10-20% in 2011-2012.
- Policy suggestions are provided for the already overvalued currency.

The ratio, Penn effect and behavioral equilibrium exchange rate (BEER) are used to assess the level of the bilateral real exchange rate of the Chinese RMB against the US dollar in 1980-2012. The statistical indexes and economic meaning indicate that the findings from the BEER and ratio models are more reasonable. Based on the two models, the RMB was overvalued by about 10-20% in 2011-2012. Given the already overvalued currency and the not-ideal economic situation, China should (1) control its excessive money supply to suppress the purchasing power parity rate appreciation and (2) keep the level of the nominal exchange rate stable.