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January 28, 2007

What if the Renminbi isn't Undervalued?

Lots of rhetoric, discussion, and general macroeconomic fretting has to do with the supposed undervaluation of the Chinese currency, the renminbi. So, what if everyone's wrong and it isn't actually undervalued? While that strikes me as unlikely, I have to confess that this NBER paper makes a thought-provoking case:

We evaluate whether the Renminbi (RMB) is misaligned, relying upon conventional statistical methods of inference. A framework built around the relationship between relative price and relative output levels is used. We find that, once sampling uncertainty and serial correlation are accounted for, there is little statistical evidence that the RMB is undervalued. The result is robust to various choices of country samples and sample periods, as well as to the inclusion of control variables.

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