Dupuy, Philippe and Carlotti, JeanEtienne (2010): The Optimal Path of the Chinese Renminbi.

PDF
MPRA_paper_26107.pdf Download (452kB)  Preview 
Abstract
This paper provides evidence on the consistency of the determination of the Chinese real effective exchange rate (REER) over time. Especially, we validate coin tegration between the REER and a set of fundamentals using recent developments in model selection. Error correction model (ECM) path dependence in model se lection is addressed by using the GeneralToSpecific (GETS) approach enabling us to obtain empirically constant and encompassing ECM. As inference in finite sam ples is commonly of concern, statistics' distributional properties for cointegration tests are estimated by Monte Carlo simulations. The final specification of the model is compatible with the natural real exchange rate of Stein (1994). We study the implications of our findings in terms of foreign exchange policy.
Item Type:  MPRA Paper 

Original Title:  The Optimal Path of the Chinese Renminbi 
Language:  English 
Keywords:  Exchange Rate, Equilibrium value, GETS, Global Imbalances 
Subjects:  F  International Economics > F3  International Finance > F31  Foreign Exchange F  International Economics > F3  International Finance > F36  Financial Aspects of Economic Integration 
Item ID:  26107 
Depositing User:  Philippe Dupuy 
Date Deposited:  25. Oct 2010 00:39 
Last Modified:  30. Dec 2015 07:47 
References:  [1] BenassyQuere A., LahrecheRevil A., and Mignon V., 2006.World Consistent Equi librium Exchange Rate. CEPII working paper 200620, December. [2] Bertsekas D.P., 1976. Dynamic programming and stochastic control, New York academic press. [3] Clark P. B., and R. MacDonald, 2000. Filtering the BEER: A Permanent and Transitory Decomposition. IMF Working Paper No. 144/2000 (Washington, DC). [4] Cline W. R., 2007. Estimating reference exchange rates. Paper presented to a work shop on policy to reduce global imbalances. Washinghton, February 89. [5] Cline W. R., and J. Williamson, 2007. Estimates of the equilibrium exchange rate of the Renminbi: is there a consensus and, if not, why not? Peterson Institute for International Economics. Conference on China's exchange rate policy, Peterson Institute, Washington DC, October 12. [6] Coudert V., and Couharde C., 2005. Real Equilibrium Exchange Rate in China. CEPII, working paper 200501. [7] Dell Ariccia G., I. Schnabel, and J. Zettelmeyer, 2006. How do ocial bailouts aect the risk of investing in emerging markets? Journal of Money, Credit and Banking, vol 38, 7, pp1689714. [8] Dickey D., and W. Fuller, 1979. Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, vol74, pp.427431. [9] Dickey D., and W. Fuller, 1981. Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, vol9, pp.1057172. [10] Driver R.L., and Westaway P.F., 2004. Concept of Equilibrium Exchange Rate. Bank of England Working Paper n248. [11] Dunaway S., L. Leight, and X. Li, 2006. How robust are estimates of equilibrium real exchange rates: the case of China, IMF working paper 06/220. [12] Edwards S., 1989. Real Exchange Rates, Devaluation, and Adjustment Exchange Rate Policy in Developing Countries. The MIT Press, Cambridge, Massachusetts. [13] Edwards S., 1994. Real and Monetary Determinants of Real Exchange Rate Be havior: Theory and Evidence from Developing countries, in John Williamson, Esti mating Equilibrium Exchange Rates. Washington, D.C.: Institute for International Economics. 22 [14] Egert B., 2004. Assessing Equilibrium Exchange Rates in CEE Acceding Countries: Can we have DEER with BEER without FEER?. Bank of Finland, Bot discussion paper 1/2004. [15] Elbadawi I., 1994. Estimating LongRun Equilibrium Exchange Rates, in John Williamson, Estimating Equilibrium Exchange Rates. Washington, D.C.: Institute for International Economics. [16] Engle R., Clive Granger, 1987. Cointegration and error correction: representation, estimation and testing. Econometrica 55, 251276. [17] Engle C., N.C. Mark, and K.D. West, 2007. Exchange rate models are not as bad as you think. NBER Macroeconomics annual 2007. [18] Ericsson Neil R., 2009. Constructive data mining, modeling Australian in ation. Under review. [19] Ericsson N.R., and James G. MacKinnon, 2002. Distributions of error correction tests for cointegration. Econometrics Journal, 5, 285318. [20] Faruqee H., 1995. LongRun Determinants of the Real Exchange Rate: A Stock Flow Equilibrium Approach. International Monetary Fund Sta Papers 42(1), March, p.80107. [21] Ferrucci Gianluigi, 2003. Empirical determinants of emerging market economies' sovereign bond spreads. Working paper 205, Bank of England. [22] Frankel J., 2005. On the Renminbi: the choice between adjustment under a xed exchange rate and adjustment under a exible rate, NBER, WP 11274. [23] Funke M., and Rahn J., 2005. Just How Undervalued is the Chinese Renminbi ?, The World Economy, Vol. 28, No. 4, pp. 465489, April 2005. [24] Goldstein M., 2004. China and the Renminbi exchange rate. in Bergsten, C.F. and J. Williamson (Editors): Dollar Adjustment: How Far? Against What?, Institute for International Economics, Washington D.C., November. [25] Gonzalo J., T.H. Lee, 1998. Pitfalls in testing for long run relationships. Journal of Econometrics, 1, June, 129154. [26] Hendry D.F., 1995. Dynamic Econometrics. Oxford University Press, Oxford. [27] Hendry D.F., and HM Krolzig, 2001. Automatic econometric model selection using PcGets 1.0, Timberlake Consultants Press, London. [28] Hoover K. D., and S.J. Perez, 1999. Data mining reconsidered: encompassing and the Generaltospecic approach to specication search. Econometrics Journal, 2, 167191. 23 [29] International Monetary Fund, 2006. Methodology for CGER Exchange Rate As sessments. Prepared by the Research Department. November 8. [30] Isard Peter, 2007. Equilibrium exchange rates: assessment methodologies. IMF working paper 07296. [31] Jeong SeEun, and Jacques Mazier, 2003. Exchange rate regimes and equilibrium exchange rates in East Asia. Revue Economique 54, 5, 116182 [32] Krueger R.C., B. Kamar, and J.E. Carlotti, 2009. Establishing conversion values for new currency unions: method and application to the planned gulf cooperation council (GCC) currency union. IMF working paper 09/184. Washington DC. [33] Lee J., G.M. MilesiFerretti, L.A. Ricci and S. Jayanthi, 2005. Equilibrium real ex change rates: estimates for industrial countries and emerging markets. Unpublished; Washington, IMF. [34] Lee J., G.M. MilesiFerretti, and L.A. Ricci, 2008. Real exchange rates and funda mentals: a crosscountry perspective. IMF Working Papers 08/13. [35] MacDonald R., 1997. What Determines Real Exchange Rates? The Long and the Short of It. IMF Working Paper 97/21, January, International Monetary Fund. [36] MacDonald Ronald, and Preethike Dias, 2007. BEER estimates and target current account imbalances. Paper presented to a workshop on policy to reduce imbalances. Washington, February 89. [37] Mussa Michael, 1984. The theory of exchange rate determination. In exchange rate theory and practice, ed. by John F.O. Bilson and Richard C. Marston, pp. 1378. [38] Newey Whitney K, and West Kenneth D, 1987. A simple positivite semidenite, Heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica, vol 55 (3), 703708. [39] Perron P., 1989. The Great Crash, the Oil Price Shock, and the Unit Root Hypoth esis. Econometrica, Econometric Society, vol. 57(6), pages 13611401, November. [40] Perron P., X. Zhu, 2005. Structural breaks with stochastic and deterministic trends. Journal of Econometrics, 129, 65119. [41] Roubini N., and Setser B., 2004. The US as a Net Debtor: The Sustainability of the US External Imbalances. Global Economic Governance Programme, University College, Oxford. [42] Shin Y., 1994. A residual based test of the null of cointegration against the alter native of noncointegration. Econometric Theory, vol10, pp.91115. 24 [43] Stein J., 1994. The Natural Real Exchange Rate of the Dollar and Determinants of Capital Flows. in Williamson J. (ed), Estimating Equilibrium Exchange Rates, Institute for International Economics, Washington. [44] Stock J., and M Watson, 1993. A simple estimator of cointegrated vectors in higher order integrated systems. Econometrica, vol61, pp.783820. [45] Stolper Thomas, and Monica Fuentes, 2007. GSDEER and trade elasticities. Paper presented at the workshop on global imbalances, Washington, February 89. [46] Swan T. W., 1963. Longerrun problems of the balance of payments. in Arndt, H.W. and W.M. and W.M. Corden, (eds.), The Australian Economy: a volume of readings, Melbourne: Cheschire. [47] Wang T., 2004. China: Sources of Real Exchange Rate Fluctuations. IMF Working Paper 04/18 and IMF Occasional Paper 232. [48] Williamson J., 1994. Estimating Equilibrium Exchange Rates. Institute for Inter national Economics, Washington. [49] WrenLewis Simon, 2004. The needed changes in bilateral exchange rates. In Dollar adjustment: how far? Against what? ed. C. Fred Bergsten and John Williamson. Washington: Institute for International Economics. [50] Zivot E., and A.D.W.K. Andrews, 1992. Further Evidence on the Great Crash, the OilPrice Shock, and the UnitRoot Hypothesis. Journal of Business & Economic Statistics, Americ 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/26107 