Estimating Equilibrium Real Exchange Rate and Real Exchange Rate Misalignment of Chinese Yuan: 1980-2007

Based on the equilibrium real exchange rate (ERER) put forward by Edwards (1989) and Johansen cointegration estimation methodology, this paper estimates the equilibrium real exchange rate of Chinese Yuan from 1980 to 2007 and calculates the real exchange rate misalignment. The result shows that the real exchange rate of Chinese Yuan was deviated from the equilibrium substantially most of the time, especially when China adopted the de facto pegged exchange rate regime during 1995-2004. In order to correct the misalignment and avoid currency crisis risk, this paper suggests that China should adopt more flexible exchange rate regime.