Open Economies Review

, Volume 20, Issue 2, pp 183–206 | Cite as

Pitfalls in Measuring Exchange Rate Misalignment

The Yuan and Other Currencies
  • Yin-Wong Cheung
  • Menzie D. ChinnEmail author
  • Eiji Fujii
Research Article


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, even though the usual regression point estimates indicate substantial misalignment. The result is robust to various choices of country samples and sample periods, as well as to the inclusion of control variables. We then update the results using the latest vintage of the data to demonstrate how fragile the results are. We find that whatever misalignment we detected in our previous work disappears in this data set.


Absolute purchasing power parity Exchange rates Real income Capital controls Currency misalignment 

JEL Classifications

F31 F41 



We thank for useful comments Jeffrey Frankel, the discussant, Christoph Fischer, and participants at the workshop “Panel Methods and Open Economies”, held at Goethe University Frankfurt, May 21, 2008, organized by Michael Binder and Heinz Herrmann. Kavan Kucko provided assistance in collecting data, and Hiro Ito provided additional data. Financial support of faculty research funds of the University of California at Santa Cruz, the University of Wisconsin, the Japan Center for Economic Research grant, and the Nomura Foundation for Social Science research grant is gratefully acknowledged. The views expressed are solely those of the authors.


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Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  • Yin-Wong Cheung
    • 1
    • 4
  • Menzie D. Chinn
    • 3
    Email author
  • Eiji Fujii
    • 2
  1. 1.Department of EconomicsUniversity of CaliforniaSanta CruzUSA
  2. 2.Graduate School of Systems and Information EngineeringUniversity of TsukubaIbarakiJapan
  3. 3.Robert M. LaFollette School of Public Affairs, Department of EconomicsUniversity of Wisconsin, and NBERMadisonUSA
  4. 4.School of Economics and FinanceUniversity of HongkongPokfulam RoadHongkong

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