An extended NATREX model for China

This paper extends, for the first time, Stein’s (1995a) NATREX model to China and other similar emerging market economies. We incorporate fundamentals that have not been studied by the existing literature on the NATREX model to capture the unique characteristics of the Chinese economy. Based on dynamic stability analysis, we derive the medium-run and long-run real equilibrium exchange rates and relative prices of non-tradables, and provide a detailed analysis of the effects of fundamentals. The fundamentals that affect the long-run equilibrium real exchange rate and the relative price of non-tradables include terms of trade, total and net factor productivity, rural transformation, dependency ratio, financial liberalization, relative unit labour cost, relative rate of return to capital, government investment, tax rate and the foreign real interest rate

Sensitivity of middle Miocene climate and regional monsoon to palaeo-altimetry

It is well-known that plate motions and the elevation of mountains belts have played a major role in palaeoclimate evolution. The present day monsoon in southeast Asia and northern Australia is associated with the Tibetan plateau. We investigate how the Miocene Climate Optimum (MCO) developed in response to altimetry changes in Eurasia and South America impacting changes in regional monsoon, wind stress and precipitation. We carried out a number of numerical experiments with alternative paleo-altimetries, using an updated NCAR coupled climate model, CCSM3, and CAM3.1 and CLM3 with slab ocean and ice models, validated with proxies. Our model results explore the sensitivities of regional climate change to plate motions and rising mountain belts as well as sea-level change. Especially, the model simulations ground-truth the monsoon evolution in the southeast Asia, northern Australia and South America

The Equilibrium Real Effective Exchange Rate of China: A NATREX Approach

In this paper we examine the determinants of China’s equilibrium real effective exchange rate and investigate the misalignments in the Renminbi. This paper makes a number of theoretical and empirical contributions. At the theoretical level, we extend the NATREX model to incorporate a large number of economic fundamentals that capture the unique features of the Chinese economy. At the empirical level, this is the first application of the extended NATREX model to China. Another contribution is that we estimate the extended NATREX model for both the pre- and post- reform periods. We have constructed a unique data set of consistent time series for the effective exchange rate and a large number of economic fundamentals for China since the 1950s. A further contribution is the use of total and net factor productivity obtained from an estimated production function. We find strong evidence of persistent undervaluation of the RMB during 1994-2005, accelerating in particularly after 2000. However the misalignment rates are much lower than those reported by previous studies. We also find weak evidence of overvaluation for most of the pre-reform period. For the rest of the sample period, there was no persistent misalignment

A FEER Model for the Equilibrium Chinese Yuan/US Dollar Real Exchange Rate

This paper provides an application of the FEER model to the real exchange rate of the Chinese Yuan against the US Dollar. An important contribution is that we incorporate into the sustainable current account fundamentals that reflect the unique features of the Chinese economy but have not been employed by previous studies. Another contribution is the construction of a unique data set of consistent time series for economic fundamentals and trade-related variables, which allow us to carry out an econometric investigation of trend and sustainable current accounts and compute the FEER for both pre- and post-reform periods. The empirical results show that both the sustainable and trend current account surpluses have been steadily rising since the early 1990s. Chinese exports appear to be more price elastic, while imports are more income elastic. The misalignment rates suggest that the RMB was overvalued against the USD during the pre-reform period and has been undervalued for most of the postreform period, particularly since 2003. However the misalignment rates are not as large as suggested by previous studies

Structural Breaks and the Equilibrium Chinese Yuan/US Dollar Real Exchange Rate: A FEER Approach

This paper examines the equilibrium real exchange rate of the Chinese Yuan against the US Dollar within the framework of the FEER model. Quarterly data for the post-reform period 1982-2009 are used. We make three important contributions to the literature. First, we allow for endogenous structural breaks in all cointegration relationships. Second, our study highlights macroeconomic fundamentals that affect savings and investment and, hence, the sustainable current account in the medium term. Third, we construct a unique set of quarterly data. We find structural breaks in all trade and the sustainable current account equations, with the break dates corresponding to important policy changes in China. The misalignment rates show that the real exchange rate was overvalued in most years until 2003, followed by undervaluation during 2004-2009. However, the average misalignment rates and revaluation required to correct this undervaluation are not as large as suggested by previous studies, with the undervaluation rate declining sharply in 2009. We further simulate misalignment rates using a sustainable current account of three percent. Our findings suggest such exogenous input leads to results biased towards larger undervaluation

An Extended NATREX Model for China

This paper extends, for the first time, Stein’s (1995a) NATREX model to China and other similar emerging market economies. We incorporate fundamentals that have not been studied by the existing literature on the NATREX model to capture the unique characteristics of the Chinese economy. Based on dynamic stability analysis, we derive the medium-run and long-run real equilibrium exchange rates and relative prices of non-tradables, and provide a detailed analysis of the effects of fundamentals. The fundamentals that affect the long-run equilibrium real exchange rate and the relative price of non-tradables include terms of trade, total and net factor productivity, rural transformation, dependency ratio, financial liberalization, relative unit labour cost, relative rate of return to capital, government investment, tax rate and the foreign real interest rate

Rural Transformation and Productivity in China

This paper carries out for the first time an econometric investigation of the contribution of rural transformation to total factor productivity in China. We find that the efficiency gains resulting from rural transformation make a significant and nontrivial contribution to factor productivity in China. During the pre-reform period (1952-1977), the average growth rate of net factor productivity, which results from technical progress, was close to zero. But when rural transformation is introduced, average total factor productivity growth becomes positive. During the post-reform period (1978-2005), both total and net factor productivity exhibited increasing trends and high positive growth rates, except during 1989-90 (the period of the political troubles in Tiananmen Square). We find that the inclusion of rural transformation increases the average growth rate of factor productivity by nearly one percentage point during the post-reform period, thus making our estimates of total factor productivity growth higher than those reported by previous studies

Labour Reallocation and Total Factor Productivity Growth in China

This paper carries out an empirical investigation of the contribution of labour reallocation, which can produce efficiency gains over and above those associated with technical progress, to total factor productivity in China during the pre-reform and post-reform periods. We consider two forms of labour reallocation, rural and ownership transformation, and exam their contribution within the frameworks of VES, CES and Cobb Douglas production functions. The empirical evidence rejects VES and CES and supports the Cobb Douglas production function. We find that rural transformation has made a highly significant contribution to total factor productivity and output growth in China irrespective of the production function and capital series employed. In contrast, ownership transformation has not had a significant impact on output and total factor productivity

An Extended FABEER Model for the Equilibrium Chinese Yuan/US Dollar Nominal Exchange Rate

This paper applies for the first time an extended FABEER model to China, in order to investigate the determinants of the equilibrium nominal CNY/USD exchange rate and the misalignments of the Renminbi for both pre- and post-reform periods. We extend the FABEER model to include eleven of China’s main trade partners which account for 82% of its foreign trade. Second, we model and estimate the sustainable current account and the trade equations by employing a unique data set of consistent time series for economic fundamentals, trade-related variables and Euro variables since 1960. The results show that the sustainable and trend current accounts for China have been positive and rising during the post-reform period, accelerating particularly since the middle of 1990s. The nominal RMB was overvalued against the US dollar throughout the pre-reform period, but was undervalued and less volatile during the post-reform period. The undervaluation became more persistent and rising since 2000, but the misalignment rates are considerably smaller than those suggested by previous studies. Our empirical findings imply that a gradual increase in the flexibility of the exchange rate system rather than a sudden switch to a floating system would be more feasible for China over the near future

Structural Breaks, Rural Transformation and Total Factor Productivity Growth in China

This paper carries out an empirical investigation into the contribution of rural transformation, which can produce efficiency gains over and above those associated with technical progress, to total factor productivity in China during the post-reform period 1980-2010. For the first time for China, the roles of rural transformation and technical progress are examined whilst structural breaks are taken into account. We employ Bai and Perron (1998, 2003a, b) methods which allow for multiple structural breaks at unknown dates and can be applied for both pure and partial structural changes. We also evaluate the robustness of our results by employing alternative production functions and two capital series. Two structural breaks near the Tiananmen Square incident in 1989 and the implementation of further reforms and opening-up measures in 1995 were identified for both capital series. We found the contribution of rural transformation to total factor productivity to be significant and positive across all regimes. However, its importance to the growth of total factor productivity has been declining over time, while that of technical progress has been increasing