Omitted variables and how the Chinese Yuan affects other Asian currencies

Abstract Bi-Directional Reiterative Truncated Projected Least Squares (BD-RTPLS) is a relatively new analytical technique that greatly reduces the bias from omitted variables. In this paper, I explain BD-RTPLS and apply it to monthly and weekly data to produce reduced form estimates of the relationship between China's exchange rate and exchange rates in the rest of Asia. I show how omitted variables have affected those relationships across countries and over time. My data spans from when China began appreciating the yuan in July 2005 through May of 2007. I find that the marginal effect of China appreciating the yuan by 2.1% at the beginning of this time period was negative, but that the marginal effect of China's slower appreciation of the yuan fro

OMITTED VARIABLES, CONFIDENCE INTERVALS, AND THE PRODUCTIVITY OF EXCHANGE RATES

A new analytical technique, named 'Bi-Directional Reiterative Truncated Projected Least Squares' (BD-RTPLS), produces reduced form estimations and less than half the error of OLS when there are omitted variables that interact with included variables. This paper develops confidence intervals for BD-RTPLS and uses BD-RTPLS to estimate the relationship between the exchange rate (e) and gross domestic product (GDP) using annual data from 1984 to 2000 for 23 developing Asian and Pacific countries. BD-RTPLS produces estimates for the exchange rate multiplier (dGDP/de) for these countries and shows how omitted variables affected these multipliers across countries and over time. Copyright 2007 Blackwell Publishing Ltd