Song, Ming (2013) The equilibrium exchange rate of RMB 2000-2011 : a BEER approach. Research Master thesis, Victoria University.

Abstract

In response to the critics that accuse China of manipulating its exchange rate and maintaining it under a substantially low level, this study applied a robust co-integrating analysis to estimate the Behavioural Equilibrium Exchange Rate of Chinese renminbi. A 6-variable VAR model was built up and the Johansen-Juselius co-integrating analysis was applied to test if there is co-integrating movement between the variables. The findings show that the real effective exchange rate of renminbi could mostly be explained with statistical significance by five fundamentals, viz. the degree of openness, government expenditure, net export, productivity and net foreign assets. The actual real effective exchange rate is fluctuating around its equilibrium level in a narrow band moderately and consequently there is no evident undervaluation or misalignment of renminbi in a long-run perspective from 2000Q1 to 2011Q4. Moreover, the slight misalignment of renminbi reveals a sound current exchange rate regime in China.

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