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Assessment on RMB valuation – a triangular analysis approach

Peijie Wang and Bing Zhang

China Finance Review International, 2014, vol. 4, issue 1, 76-95

Abstract: Purpose - – The authors make assessment on RMB valuation and to contribute to the fierce debate on this important issue, which is perceived to have a great effect on the improvement or deterioration in trade balance. A triangular analysis approach is put forward and empirical assessment is made. The paper aims to discuss these issues. Design/methodology/approach - – A triangular analysis approach based on no arbitrage conditions for three currencies, and causality and influence analysis. Findings - – First, it has been found that the movements in the RMB dollar exchange rate do influence the dollar euro exchange rate and the former do have a causality effect on the latter, in both the long run and the short term. Second, it is implied that the RMB is overvalued Practical implications - – First, the peg of the RMB to the US dollar that undervalues the RMB Originality/value - – A new triangular analysis approach in international finance research. First, there is an advantage to adopt this seemingly simple analytical framework: it is highly reliable; no triangular arbitrage conditions have to be met even under exchange controls, whilst PPP may not hold even with flexible exchange rate regimes. Second, it does away with the thinking confined to small open economies that has dominated academic research for so long and is totally inapplicable to the RMB case.

Keywords: Exchange rate; Euro; RMB; US dollar (search for similar items in EconPapers)
Date: 2014
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