Theory and Refinement of the Enhanced-PPP Model for Equilibrium Exchange Rates ---- With Estimates for Valuations of Dollar, Yuan and Others

This study establishes a rigorous theory for the recent popular enhanced-Purchasing-Power-Parity model for estimating the long run equilibrium exchange rates of currencies. The necessary and sufficient conditions for the validity of the model are derived and proved. Based on the theory, this research takes into account the economic sizes of the countries along with the Balassa-Samuelson effect, and refines the Frankel-Rogoff specification. The refined model is applied to the data to estimate the under- or over-valuation of different currencies in the world. An empirical test to assess these estimation results further supports the validity of the model