The Overvaluation of Renminbi Undervaluation

Abstract

This working paper was written by Yin-wong Cheung (University of California, Santa Cruz), Menzie D. Chinn (University of Wisconsin, Madison and NBER) and Eiji Fujii (University of Tsukuba).

We evaluate whether the Renminbi (RMB) is misaligned, relying upon conventional statistical methods of inference. A framework built around the relationship between relative price and relative output levels is used. We find that, once sampling uncertainty and serial correlation are accounted for, there is little statistical evidence that the RMB is undervalued. The result is robust to various choices of country samples and sample periods, as well as to the inclusion of control variables.

Keywords: absolute purchasing power parity, exchange rates, real income, capital controls, currency misalignment

JEL Classification: F31, F41