THE EQUILIBRIUM EXCHANGE-RATE OF THE CHINESE RENMINBI

Two approaches are used in this paper to estimate the equilibrium exch ange rates of the Chinese currency, the renminbi (RMB): the purchasing power parity (PPP) model and the shadow price of foreign exchange (SP FE) model. The SPFEs are estimated including tariffs and import quotas . The paper starts with a test for the long-run PPP using quarterly da ta. In comparison with the estimated equilibrium exchange rates, we fi nd that the actual rates were in general overvalued. From 1990 to 1994 , the official exchange rates are found to lie between the PPP rates a nd the SPFEs. This implies that the Chinese government has adopted an exchange rate policy that maintains official exchange rates close to e quilibrium levels. (C) 1998 Academic Press.