China External Environment Monitor
Working Paper 2014.005
Nov.6 2014
Value-Added Effective Exchange Rates for China: Facts and Implications
Panpan Yang, Xiaoqin Li, Qiyuan Xu
Abstract
This paper computes both industrial level and aggregated value-added effective exchange rate (EER) for RMB. For industrial level EER, this paper provides a comprehensive industrial level EER for 33 industries and promotes better understanding of China’s external competitiveness in both tradable and non-tradable sectors. For aggregated EER, this paper shows that RMB appreciates more (7%-8%) after adjusting weights by global value chain. Thus, by using conventional EER, the external competitiveness of China might be overestimated. By considering vertical specialization and global value chain, value-added EER can provide a better understanding of one country’s external competitiveness. And it has many policy implications for China.
Key words: Value-added Effective Exchange Rate, Tradable, Non-tradable, Global Value Chain
1. Introduction
Effective exchange rates (both nominal and real, EERs) are of great importance for one country’s foreign economic policy. This is especially the case for China: evaluating external competitiveness, making adjustment for imbalances and assessing proper exchange rates are all significant issues requiring obtaining proper EERs.
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2. Literature Review
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3. Methodology and Data
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4. Industrial Level Value-added Effective Exchange rates
A major contribution of this paper is that we are trying to analyze value-added EERs in industrial level. In this part, we will provide industrial level EERs. Quite different from other major industrial level EERs, we provide EERs for both tradable and non-tradable industries. Such comprehensive industrial level EERs are necessary with current background of domestic reform and international trade trend.
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5. Aggregated Value-added Effective Exchange rates
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