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The Illusion of Precision and the Role of the Renminbi in Regional IntegrationYin-Wong CheungCity University of Hong Kong - Department of Economics & Finance; University of California at Santa Cruz - Department of Economics Menzie David ChinnUniversity of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics; National Bureau of Economic Research (NBER) Eiji FujiiKwansei Gakuin University - School of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) December 2006 HKIMR Working Paper No. 18/2006 Abstract: 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, F41 working papers seriesDate posted: August 22, 2007Suggested CitationContact Information
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