How Robust are Estimates of Equilibrium Real Exchange Rates: The Case of China

Author/Editor:

Lamin Y Leigh ; Steven V Dunaway ; Xiangming Li

Publication Date:

October 1, 2006

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Increased attention is being paid to assessments of the actual values of countries' real exchange rates relative to their "equilibrium" values as suggested by "fundamental" determining factors. This paper assesses the robustness of alternative approaches and models commonly used to derive equilibrium real exchange rate estimates. Using China's currency to illustrate this analysis, the variance in estimates raises serious questions regarding how robust the results are. The basic conclusion from the tests used here is that, at least for China, small changes in model specifications, explanatory variable definitions, and time periods used in estimation can lead to very substantial differences in equilibrium real exchange rate estimates. Thus, such estimates should be treated with great caution.

Series:

Working Paper No. 2006/220

Subject:

Current account balance Exchange rates Purchasing power parity Real effective exchange rates Real exchange rates

English

Publication Date:

October 1, 2006

ISBN/ISSN:

9781451864809/1018-5941

Stock No:

WPIEA2006220

Pages:

13

Please address any questions about this title to publications@imf.org