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The PPP approach revisited: A study of RMB valuation against the USD

Ingvild Almås, Mandeep Grewal, Marielle Hvide and Serhat Ugurlu ()

Journal of International Money and Finance, 2017, vol. 77, issue C, 18-38

Abstract: We analyze the alleged undervaluation of the Chinese renminbi against the US dollar through an application of the relative PPP hypothesis, the PPP approach. The PPP approach measures the relative misalignment of a currency by estimating the relationship between log price levels and log per capita real incomes from a cross section of countries. We estimate this relationship by using ICP 2011 and incorporating model selection tests. Our results confirm that price level-real income relationship is best approximated by a quadratic functional form. We show that, using this functional form, the PPP approach does not reveal any evidence of renminbi undervaluation as of 2011, and this result is robust to various sensitivity tests.

Keywords: Renminbi; Currency misalignment; Penn effect (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2017
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