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

You, Kefei and Sarantis, Nicholas (2011) Structural Breaks and the Equilibrium Chinese Yuan/US Dollar Real Exchange Rate: A FEER Approach. Centre for EMEA Banking, Finance and Economics Working Paper Series, 2011 (20). pp. 2-41.

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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: Article
Uncontrolled Keywords: Centre for EMEA Banking, Finance and Economics Working Paper Series, Fundamental equilibrium exchange rate; Real CNY/USD; Structural breaks; Misalignments; China
Subjects: 300 Social sciences > 330 Economics
Department: Guildhall School of Business and Law
Depositing User: David Pester
Date Deposited: 20 Apr 2015 15:06
Last Modified: 21 Apr 2015 11:28
URI: http://repository.londonmet.ac.uk/id/eprint/438

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