Friday, 21 December 2007

On the Evolution of China Exchange Rate

Since July 2005 when China officially moved from a US peg to a "basket of currencies" the behaviour of the Chinese currency has been closely observed with many newspaper and blog column inches being devoted to this subject.

For those with an academic bent, the following paper by Funke and Gromwold take an econometric approach to predict where the US-RMB exchange rate will be in a years time.

They predict:

Our estimation results imply that the RMB/USD exchange rate will likely be about 7.42 RMB/USD in summer/autumn 2008.


It I was a currency trader and believed these results I could take some fairly large positions. It will be interesting to watch for developments over the next year.

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"The Undisclosed Renminbi Basket: Are the Markets Telling us Something About Where the Renminbi - US Dollar Exchange Rate is Going?"
BOFIT Discussion Paper No. 20/2007

Contact: MICHAEL FUNKE
University of Hamburg - Faculty of Economics and
Business Administration, CESifo (Center for
Economic Studies and Ifo Institute for Economic
Research)
Email: funke@econ.uni-hamburg.de
Auth-Page: http://ssrn.com/author=494050

Co-Author: MARC GRONWALD
University of Hamburg
Email: gronwald@econ.uni-hamburg.de
Auth-Page: http://ssrn.com/author=491898

Full Text: http://ssrn.com/abstract=1027868

ABSTRACT: On 21 July 2005 China adopted an undisclosed basket exchange rate regime. We formally assess and envisage the gradual evolution of the renminbi over time. We utilize nonlinear dependencies in the renminbi exchange rate and describe the smooth transition of the renminbi/U.S. dollar (RMB/USD) exchange rate using the family of time-varying autoregressive (TV-AR) models. Specifically, the nonlinear models allow for a smooth transition from one optimal level to another. Our estimation results imply that the RMB/USD exchange rate will likely be about 7.42 RMB/USD in summer/autumn 2008.

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