The equilibrium exchange rate of the Chinese Renminbi: determinants and misalignments

The aim of this thesis is to investigate the equilibrium exchange rate of the Chinese currency, Renminbi (RMB). We extend the NATREX and FABEER models and modify the FEER model to make them applicable to China. Empirical estimations are carried out to obtain the equilibrium exchange rate for the real bilateral CNY/USD, nominal bilateral CNY/USD, and the real effective exchange rates. The sample period is 1952-2005. This thesis incorporates into the theoretical models a large number of economic fundamentals that capture the unique features of the Chinese economy. No previous study covers and analyses such a wide range of fundamentals. In addition, 11 of China's main trade partners are included in the extended multi-country FABEER model. Many ofthese trade partners have never been included in any previous studies. This thesis constructs a large data set of consistent time series that includes economic fundamentals, trade-related variables, Euro variables and real effective exchange rate for the period 1952-2005. It carries out for first time an econometric estimation of total factor productivity when rural transformation is taken into account. The effective exchange rate was for the first time constructed backwards to 1960, including trade partners that account for over 80% of China's foreign trade. At the empirical level, the thesis provides the first comprehensive application and comparison of the NATREX, FEER and FABEER models to China. It is also the first time the equilibrium exchange rates for the nominal bilateral CNY !Usn and the real effective exchange rates are estimated for both pre- and post-reform periods. In addition, it is the first study that presents a comparative investigation of different measures of the exchange rate. The empirical results support the equilibrium relationships between the econormc fundamentals and the exchange rates in a manner that is consistent with the predictions of the theoretical models. The empirical evidence generally suggests overvaluation in the pre-reform period and undervaluation for the post-reform period. However, the misalignment rates, especially for the recent years, have not been as large as suggested by most previous studies