The Yuan's Fair Value: A Conundrum

Paper Summary:

This paper deals with the recent attempt to determine the supposed undervaluation of the Chinese Yuan versus the American dollar. It discusses different economic approaches to determine the real exchange rate such as purchasing power parity (PPP), fundamental equilibrium exchange rate (FEER), and behavioral equilibrium exchange rate (BEER). Finally it ventures to determine a real exchange rate with simple tool based on purchasing power parity and ideas drawn from the Balassa-Samuelson hypothesis.
Introduction
The Statistics of Papers On The Equilibrium Exchange Rate
For The Chinese Currency
Approaches Based On an Economic Theory
Purchasing Power Parity Approach
Fundamental Equilibrium Exchange Rate
Behavioral Equilibrium Exchange Rate
Estimating a Fair Value with Simple Tools
The Concept of the Big Mac Index
Purchasing Power Parity as the Determinant of
Real Long-Term Exchange
Balassa-Samuelson Hypothesis
Conclusion
References
Appendix

From the Paper:

" A more medium-term concept, and thus more useful for policy purposes is the fundamental equilibrium exchange rate (FEER) developed by Williamson (1994), which defines the equilibrium exchange rate as the real exchange rate that satisfies simultaneously internal and external balances. The cornerstone of this approach is current account sustainability, i.e. the level of current account deficits/surpluses that matches long-term capital inflows/outflows. External balance suggests a sustainable current account balance. An internal balance is meant to be full employment with low inflation. The delicate aspect of the FEER approach is that it needs a normative judgment regarding the size of long-term capital flows. FEER estimates are usually derived from large scale macro-econometric models or partial trade blocks of a given economy. "

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