Central Bank Foreign Exchange Intervention and Exchange Rate Expectation
We document that RMB exchange rate expectation follows an extrapolative pattern,and the"extrapolative coefficient",defined as the relationship between RMB spot exchange rate and its expectation,have experienced several structural changes since 2013.Before Au-gust 2015,RMB exchange rate expectation behaved in a"self-stabilizing"manner in the sense that the extrapolative coefficient was negative.However,since August 2015,RMB expectation turned"self-destabilizing"in the sense that the extrapolative coefficient became positive until the end of 2016.Since 2017,as The People's Bank of China gradually ended regular foreign exchange(forex)intervention,the extrapolative co-efficient diminished to zero.By developing an infinite-period Noisy-Rational-Expectation-Equilibrium model incorporating forex intervention,we show that the sign of the extrapolative coefficient is affected by both the intensity and the clarity of central bank intervention.Intensive in-tervention can keep RMB exchange rate expectation in the"self-stabilizing zone"by counter-cyclically adjusting forex supply,but lack of clar-ity may destabilize exchange rate expectation by increasing the risk premium required by forex investors.We then show empirically that the temporary deterioration of clarity in the forex intervention could explain 37％-44％of the jump in the extrapolative coefficient after August 2015.
exchange rate expectationcentral bank foreign exchange interventionclarity of intervention
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