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An Extended FABEER Model for the Equilibrium Chinese Yuan/US Dollar Nominal Exchange Rate

An Extended FABEER Model for the Equilibrium Chinese Yuan/US Dollar Nominal Exchange Rate

You, Kefei ORCID: 0000-0001-7253-5838 and Sarantis, Nicholas (2009) An Extended FABEER Model for the Equilibrium Chinese Yuan/US Dollar Nominal Exchange Rate. [Working Paper] (Unpublished)

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Abstract

This paper applies for the first time an extended FABEER model to China, in order to investigate the determinants of the equilibrium nominal CNY/USD exchange rate and the misalignments of the Renminbi for both pre- and post-reform periods. We extend the FABEER model to include eleven of China’s main trade partners which account for 82% of its foreign trade. Second, we model and estimate the sustainable current account and the trade equations by employing a unique data set of consistent time series for economic fundamentals, trade-related variables and Euro variables since 1960. The results show that the sustainable and trend current accounts for China have been positive and rising during the post-reform period, accelerating particularly since the middle of 1990s. The nominal RMB was overvalued against the US dollar throughout the pre-reform period, but was undervalued and less volatile during the post-reform period. The undervaluation became more persistent and rising since 2000, but the misalignment rates are considerably smaller than those suggested by previous studies. Our empirical findings imply that a gradual increase in the flexibility of the exchange rate system rather than a sudden switch to a floating system would be more feasible for China over the near future.

Item Type: Working Paper
Additional Information: Paper subsequently presented at the "Money Macro and Finance (MMF) Research Group", 41st Annual Conference, Bradford, UK, 6 September 2009.
Uncontrolled Keywords: FABEER model; Fundamental equilibrium exchange rate; Nominal CNY/USD; China; Pre- and post-reform periods
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
H Social Sciences > HG Finance
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Department of Accounting & Finance
Last Modified: 27 Feb 2019 16:01
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
Selected for GREAT 2019: None
URI: http://gala.gre.ac.uk/id/eprint/21409

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