Estimating China’s “Equilibrium” Real Exchange Rat.pdf

WP/05/202 Estimating China’s “Equilibrium” Real Exchange Rate Steven Dunaway and Xiangming Li © 2005 International Monetary Fund WP/05/202 IMF Working Paper Asia and Pacific Department and Policy Development and Review Department Estimating China’s “Equilibrium” Real Exchange Rate Prepared by Steven Dunaway and Xiangming Li October 2005 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. The number of studies attempting to estimate the “equilibrium” real value of China’s currency has proliferated in recent years as the country’s presence in world markets has grown. These studies have sought to establish whether or not a significant part of China’s competitive prowess can be attributed to the foreign exchange value of the renminbi. Unfortunately, no consensus has emerged because the studies yield a very wide range of estimates. The paper looks at a sample of these studies, with estimates of undervaluation ranging from zero to nearly 50 percent. It attributes the wide variation in these estimates to the influence of such factors as the different methodologies used, explanatory variables included, subjective judgments of the various researchers in deriving their results, and instability in underlying economic relationships, especially in a rapidly developing economy like China. JEL Classification Numbers: F31 Keywords: Exchange