Measuring RMB equilibrium exchange rate and misalignment in China: Application of BEER and PEER approaches

Jun Wen and Muhammad Ahmad Usman

The Journal of International Trade & Economic Development, 2024, vol. 33, issue 7, 1323-1344

Abstract: The study attempts to measure RMB real effective exchange rate (REER) equilibrium and its associated degree of misalignments for China using the behavioral equilibrium exchange rate (BEER) and permanent equilibrium exchange rate approaches. We use a range of economic fundamentals and employ yearly data covering the period 1980–2020, and apply the Johansen Cointegration test and other econometric methods for the study purpose. We find evidence of the existence of RMB real effective exchange rate equilibrium, and for most of the periods, the RMB REER is closer to its equilibrium level. We also find that the RMB REER misaligned with its equilibrium producing episodes of undervaluation and overvaluation, but the magnitude of the misalignments is small and the BEER approach produces a lower degree of misalignments. This suggests that the RMB undervaluation is moderate and not as exaggerated. We identify that the economic fundamentals used in this study are important determinants of RMB real effective exchange rate equilibrium. In line with the above, the study recommends that China may continue using its RMB exchange rate as its policy tool, but the policymakers should focus on the core fundamentals that derived the equilibrium exchange rate.

Date: 2024
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DOI: 10.1080/09638199.2023.2250471

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