The Illusion of Precision and the Role of the Renminbi in Regional Integration
City University of Hong Kong - Department of Economics & Finance; University of California at Santa Cruz - Department of Economics
Menzie David Chinn
University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics; National Bureau of Economic Research (NBER)
Kwansei Gakuin University - School of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
HKIMR Working Paper No. 18/2006
The debate on renminbi (RMB) revaluation has not subsided, despite the policy change announced by the Chinese authorities in July 2005. In this chapter, we show that the evidence of RMB undervaluation may not be as strong as it appears. Specifically, depending on the method used, the evidence ranges from slight overvaluation to undervaluation. Even in the case of undervaluation, the results are not significant in the statistical sense. We also note that China is playing an important economic role in Asia and has established a complex production and trade network with its neighboring economies, which complicates the calculation of the equilibrium exchange rate. Thus, a change in Chinese exchange rate policy in response to demands from foreign countries and short-run considerations may have undesirable effects on the economies of China and the Asian region.
Number of Pages in PDF File: 36
Keywords: exchange rate policy, regional integration, market integration, purchasing power parity, Balassa-Samuelson, currency misalignment
JEL Classification: F31, F41working papers series
Date posted: August 22, 2007
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