Renewed Estimation of a Single Equation for the Chinese Renminbi

Abstract

This paper provides evidence on the consistency of the determination of the Chinese real effective exchange rate (REER) over time using Elbadawi (1994)'s model. Especially, we validate cointegration between the REER and a set of fundamentals using recent developments in model selection. Error correction model (ECM) path dependence in model selection is addressed by using the General-To-Specific (GETS) approach enabling us to obtain empirically constant and encompassing ECM. As inference in finite samples is commonly of concern, statistics' distributional properties for cointegration tests are estimated by Monte Carlo simulations. We briefly study the implications of our findings in terms of foreign exchange policy.