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A Study on the Long-Run Real Exchange Rate in China
Real exchange rate
|Issue Date:||2009-09-14 13:29:35 (UTC+8)|
As China plays an important role in the world economy, the research on the real exchange rate in China has received a lot of attention. This study chiefly contributes to adopt a more reliable proxy different from previous studies to capture the Balassa-Samuelson effect; in addition, we formerly introduce the expectation of Renminbi into the empirical model. This paper empirically investigates the behavior of the real exchange rate in China during the period from 1980 to 2005. Particularly, we provide a single-equation in an empirical framework which takes the specific features and characteristics in China economy into account. The empirical evidence shows that the degree of openness, the volume of hot money, and the relative productivity of traded to nontraded sectors are key factors to the determination of the long-run equilibrium real exchange rate in China. Both the increases in the relative productivity and an anticipated appreciation in the real exchange rate eventually may lead to a real appreciation in the currency. In contrast, the influence for opening up to the world economy is that the real exchange rate may depreciate.
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