Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
968411 | Journal of Policy Modeling | 2007 | 13 Pages |
It is claimed that China's currency market interventions have caused massive trade imbalances in favor of China. Without an accurate estimate of RMB's long-run equilibrium value, however, the validity of this claim can’t be ascertained. This paper aims to place the debate about the degree of RMB's misalignment in a tractable framework by estimating the long run equilibrium real effective exchange rate of the currency. Based on estimation of the behavioral equilibrium exchange rate (BEER) and using Johansen co-integration technique, we conclude that RMB fluctuates around its long-run equilibrium rate within a narrow band. This implies that the currency has not been consistently undervalued. We identify the money supply, the foreign reserve holdings of China's central bank, and a measure of China's productivity as important explanatory variables of renminbi long-run equilibrium value. A discussion of the implications of the empirical findings of this study indicates that China's exchange rate policy may have played an insignificant role in its trade surpluses.