This paper investigates the equilibrium exchange rate between the Chinese Renminbi (RMB) and the U.S. Dollar to assess the RMB’s misalignment issue by computing an undervaluation range using the purchasing power parity (PPP) theory and the behaviora...
This paper investigates the equilibrium exchange rate between the Chinese Renminbi (RMB) and the U.S. Dollar to assess the RMB’s misalignment issue by computing an undervaluation range using the purchasing power parity (PPP) theory and the behavioral real exchange rate (BEER) model. The paper first reviews the evolution of China’s exchange rate regime and presents the RMB-undervaluation issue. Second, the paper introduces almost all recent studies attempting to compute the misalignment of the RMB and summarizes the results from these studies. It is found out that previous studies have yielded a very wide range of estimates of the RMB’s undervaluation from little or no undervaluation to an undervaluation of nearly 60 percent. In succession, the paper discusses the reasons for employing the PPP theory and the BEER model. At last, it expounds and conducts these two models and concludes that the undervaluations from two models are 15.517% and 49.914%, respectively.