Gao Xiaolong and Zhang Zhixin
This paper compares various methods of measuring the equilibrium exchange rate. We believe that it should be considered the three aspects of essential attribute of the exchange rate, the economic situation and regulating needs of policies when it comes to the measure of RMB equilibrium exchange rate. The paper points out that the extended PPP method is more appropriate than the FEER approach and it is a “second-best” choice. Then we make a systematic review of the literatures and commentary on how to measure equilibrium exchange rate properly with the application of PPP. We believe that the extended PPP approach would be better suited to measure RMB equilibrium exchange rate than the other relative PPP methods. According to the PPP data published in 2005 by the World Bank, we have successfully countered and interpret a series of statement which were suspected overvaluation of Chinese PPP, accordingly it is very difficult to reach the conclusion that RMB exchange rate has been seriously underestimated, which mean that the current price level in China is compatible with the economic level and the ratio of prices with other countries is basically normal.
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