A Comparison of the Beer and Penn Effect Models Via Their Applications on the Valuation of the Renminbi

Abstract

The behavioral equilibrium exchange rate (BEER) and the Penn effect models are compared via their applications on the valuation of the Renminbi (RMB). Considering the two models’ bases and applications, I conclude that, in time-series and cross-section data settings, the Penn effect model is the more reasonable or more robust model for currency valuation. In a panel data setting, the Penn effect model can be viewed as a special form of the BEER model; however, the latter includes many other forms that are different from the former. The criteria and methods of comparing different model findings are given and used to compare typical misalignment results on RMB derived from the two models. According to the misalignment classification comparison, each model’s findings from the BEER model are only partly reasonable but each model’s findings from the Penn effect model are wholly reasonable. Thus, the latter is more reasonable than the former.