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Structural Breaks and the Equilibrium Chinese Yuan/US Dollar Real Exchange Rate: A FEER Approach

Structural Breaks and the Equilibrium Chinese Yuan/US Dollar Real Exchange Rate: A FEER Approach

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. [Working Paper] (Unpublished)

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Abstract

This paper examines the equilibrium real exchange rate of the Chinese Yuan against the US Dollar within the framework of the FEER model. Quarterly data for the post-reform period 1982-2009 are used. We make three important contributions to the literature. First, we allow for endogenous structural breaks in all cointegration relationships. Second, our study highlights macroeconomic fundamentals that affect savings and investment and, hence, the sustainable current account in the medium term. Third, we construct a unique set of quarterly data. We find structural breaks in all trade and the sustainable current account equations, with the break dates corresponding to important policy changes in China. The misalignment rates show that the real exchange rate was overvalued in most years until 2003, followed by undervaluation during 2004-2009. 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. We further simulate misalignment rates using a sustainable current account of three percent. Our findings suggest such exogenous input leads to results biased towards larger undervaluation.

Item Type: Working Paper
Additional Information: Paper originally presented at the 3rd Emerging Market Group Conference: "Emerging Market Finance", hosted by the Cass Business School, City University London, 4 May 2011.
Uncontrolled Keywords: Fundamental equilibrium exchange rate; Real CNY/USD; Structural breaks; Misalignments; China
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/21411

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