Estimating Historical Exchange Rate Misalignments of Five Economies

This study investigates whether the widespread assertion of currency manipulation of the Chinese Remninbi (RMB) has sound empirical support in the sense that whether the undervalued misalignment found in the real effective exchange rate (REER) of the RMB over the last decade is historically unprecedented. Four cases are examined from a historical and comparative angle: the Japanese yen, the Deutsche mark, the Singapore dollar and the Taiwan dollar. Panel-based misalignment estimates of the REER of the four currencies are obtained using quarterly data ranging from the late 1970s to the early 2000s. The estimates show that the recent misalignment of the RMB is not unprecedented in terms of magnitude, duration or width of currency coverage, and that net foreign asset build-up does not necessarily result in currency misalignment. The assertion of ‘RMB rate manipulation’ thus lacks historically persuasive precedent. Our estimates also show that volatility in the REER misalignment is likely to propagate inflation of the home economy concerned.