Determination of Renminbi Equilibrium Exchange Rate, Misalignment, and Official Intervention

We use an equilibrium real exchange rates (ERER) model to estimate the equilibrium exchange rate (EER) and hence the misalignment between the EER and actual renminbi (RMB) exchange rate with quarterly data from 1994 to 2012. The effect of various policy changes on this misalignment with a focus on official intervention is then examined. We find that the RMB EER rose 45 percent from 1994 to 2012, mainly due to trade policy and relative technological progress. The central bank’s (the People’s Bank of China) official intervention had quick effect on the misalignment, especially after 2005.