You, Kefei ORCID: 0000-0001-7253-5838 and Sarantis, Nicholas (2011) Structural breaks and the equilibrium Chinese Yuan/US dollar real exchange rate: A FEER approach. Review of International Economics, 19 (5). pp. 791-808. ISSN 0965-7576 (Print), 1467-9396 (Online) (doi:https://doi.org/10.1111/j.1467-9396.2011.00986.x)

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Abstract

This paper examines the equilibrium Chinese yuan/US dollar (CNY/USD) real exchange rate within the framework of the fundamental equilibrium exchange rate (FEER) model. Endogenous structural breaks are allowed for in all cointegration relationships. Macroeconomic fundamentals that affect medium-term savings and investment and hence, the sustainable current account, are also highlighted. A unique set of quarterly data for the post-reform period (1982–2009) is constructed. This paper finds structural breaks in all trade and the sustainable current account equations. The misalignment rates show that the real exchange rate was overvalued in most years until 2003, followed by undervaluation during 2004–09. However, the average misalignment rates and revaluation required to correct this undervaluation are not as large as suggested by previous studies, with the undervaluation rate declining sharply in 2009. Further, misalignment rates are computed using a sustainable current account of 3%. The findings suggest such exogenous input leads to results biased towards larger undervaluation.

Item Type:	Article
Uncontrolled Keywords:	China; RMB; FEER; Structural breaks; Misalignments
Subjects:	H Social Sciences > HG Finance
Faculty / School / Research Centre / Research Group:	Faculty of Business Faculty of Business > Department of Accounting & Finance
Last Modified:	27 Feb 2019 16:01
URI:	http://gala.gre.ac.uk/id/eprint/16262

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