IMF Working Papers

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

By Lamin Y Leigh, Steven V Dunaway, Xiangming Li

October 1, 2006

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Format: Chicago

Lamin Y Leigh, Steven V Dunaway, and Xiangming Li. "How Robust are Estimates of Equilibrium Real Exchange Rates: The Case of China", IMF Working Papers 2006, 220 (2006), accessed April 30, 2025, https://doi.org/10.5089/9781451864809.001

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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.

Subject: Current account balance, Exchange rates, Purchasing power parity, Real effective exchange rates, Real exchange rates

Keywords: Estimation, Undervaluation, WP

Publication Details

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