Pitfalls in Measuring Exchange Rate Misalignment |
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| Authors: | Yin-Wong Cheung Menzie D. Chinn Eiji Fujii |
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| Affiliation: | (1) Department of Economics, University of California, Santa Cruz, CA 95064, USA;(2) Graduate School of Systems and Information Engineering, University of Tsukuba, Tennodai 1-1-1, Tsukuba, Ibaraki, Japan;(3) Robert M. LaFollette School of Public Affairs, Department of Economics, University of Wisconsin, and NBER, 1180 Observatory Drive, Madison, WI 53706-1393, USA;(4) School of Economics and Finance, University of Hongkong, Pokfulam Road, Hongkong |
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| Abstract: | ![]()
We evaluate whether the Renminbi (RMB) is misaligned, relying upon conventional statistical methods of inference. A framework built around the relationship between relative price and relative output levels is used. We find that, once sampling uncertainty and serial correlation are accounted for, there is little statistical evidence that the RMB is undervalued, even though the usual regression point estimates indicate substantial misalignment. The result is robust to various choices of country samples and sample periods, as well as to the inclusion of control variables. We then update the results using the latest vintage of the data to demonstrate how fragile the results are. We find that whatever misalignment we detected in our previous work disappears in this data set. |
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| Keywords: | Absolute purchasing power parity Exchange rates Real income Capital controls Currency misalignment |
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