O'Reilly logo

Handbook of Exchange Rates by Lucio Sarno, Ian Marsh, Jessica James

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

27.3 Undervalued or Overvalued

The inability of structural macro and time-series models to explain exchange rate movements is well documented by Meese and Rogoff (1983). Their result that these models cannot out perform a naive random walk specification has proven robust. For many years, researchers have found it difficult to reject the hypothesis that major country exchange rates follow a random walk under floating exchange rate regimes (Cheung et al., 2005; Meese and Rogoff, (1983); Rogoff, 1996). An implication of this finding is that the prospect of having a commonly agreed framework to assess exchange rate misalignment is pretty unpromising.

27.3.1 The FEER Misalignment Estimate

There is no shortage of RMB misalignment estimates that vary considerably from one study to the other. Table 27.1 updates the list of recent estimates of the degree of RMB misalignment in Cheung et al. (2010a). One striking observation is the dispersion of these misalignment estimates, ranging from a 44% undervaluation to an over 100% overvaluation.

Table 27.1 Some Recent RMB Misalignment Estimates

Estimate As of Source
+49% July 2011 The Economist (2011), Big Mac Index
+33% March 2009 Cline and Williamson (2010), FEER
+31%a 2005 Subramanian (2010), Penn Effect
+21%b End of 2008 Goldstein and Lardy (2009), External Balance
+17.5c 2009 Wang and Hu (2010), FEER, external balance
+10% 2010Q1 Tenengauzer (2010), external balance
+2.56% 2009Q4 Stupnytska et al. (2009), BEER
−5% 2008

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required