Research On The Foreign Exchange Market Expectation Management Of China’s Central Bank

Since the global financial crisis in 2008,central banks of the world’s major economies have played an important role in guiding financial market expectations through strengthen the management of financial market expectations,overcome the disadvantages of traditional monetary policy tools,indirectly boost the development confidence of market players,and promote the formation of optimistic expectations of market players.However,the global financial and economic environment has undergone major changes due to China-US trade frictions and the impact of COVID-19 since 2018.In particular,the RMB exchange rate volatility has significantly increased,posing challenges for China to cope with the impact of internal and external risks.The Central Economic Work Conference stressed that "the government should respond to social concern timely,targeted active guide market expectations",meanwhile the conference put forward the "six stability" policy for the first time,and the put forward "to stable employment,stable steady finance,foreign trade,foreign investment,investment,stable expected work",which stabilizing expectations highlight the government strengthens the important role of communication and guidance for the public expected.In particular,the frequency of communication between the central bank and the market increased significantly which put the role of expectation management of the central bank into a more important position after the Financial Stability Commission held the expert symposium on "expectation management of Financial market".The Central Economic Work Conference pointed out that China’s economic development faces " supply shocks and demand contraction expected weaker " triple pressure,and made a series of "steady growth " policy deployment in 2021.China is from an export-oriented strategy toward the domestic large cycle as the main new development pattern at present,domestic and international dual cycle to promote the new development pattern of each other.Whether imports to meet the domestic large cycle or export trade to meet the domestic and international dual cycle needs to be stable exchange rate environment.The pace of China’s financial reform and opening-up policy continues to accelerate at the same time,the central bank is gradually withdrawing direct exchange rate regulation measures mainly based on regular foreign exchange intervention,which puts forward higher requirements for the foreign exchange market’s ability to deal with exchange rate risk shocks.Therefore,more attention should be paid to the communication between the central bank and the foreign exchange market.How to better adapt to the requirements of financial reform and effectively maintain the stability of the RMB exchange rate is an important basis for promoting high-quality economic development and forming a new development pattern,and has always been an important topic of exchange rate management in China’s central bank.Based on the above considerations,this paper mainly focuses on the following three aspects: Firstly,clearly defined the connotation of the central bank is expected to manage the development and the management theory of expectation of overview,based on the comprehensive carding on the existing literature,around what is expected the central bank management,why need the central bank expected management,whether the central bank is expected to manage effectively the logic chain of literature review,This paper discusses the importance and effectiveness of central bank expectation management from four aspects.Because of the differences in financial development stages between developed and emerging economies,the effectiveness of central bank expectations management of the two types of economies is studied in-depth,and the communication practices of central banks of developed and emerging economies are investigated in detail,from which a series of expected management methods are extracted for reference.Secondly,the author comprehensively and systematically expounds on the development of China’s foreign exchange market and the change of exchange rate from the traditional expected management and the present situation of China’s central bank foreign exchange market expectations management,motivation,and carried on the thorough analysis of existing problems,then establish the mode on two expected management theoretical basis.First of all,this paper constructs a theoretical model of local equilibrium in the foreign exchange market and makes an empirical analysis of the mechanism of China’s foreign exchange intervention affecting RMB exchange rate expectation.Next,the exchange rate communication events of the central bank of China in the foreign exchange market are manually sorted out with the help of the policy positions and viewpoints of the written and oral exchange rate communication of the central bank,and the effectiveness of exchange rate communication in the foreign exchange market of China is empirically analyzed through the EGARH model compared with foreign exchange intervention.Last,Because China’s financial reform is still in the stage of dynamic adjustment,general regulation,and the process of marketization,considering China’s marketization of interest rate,exchange rate and stages of capital account liberalization,market expectations for the influence of the foreign exchange administration may not be consistent,to test in the different stages of financial development how to better play to the management of the expected utility,reduce the potential loss of social welfare.In this paper,an open economy DSGE model containing expectations management setting is constructed to conduct impulse response and numerical simulation policy test to explore the optimal expectations management path of the central bank’s foreign exchange market.Finally,the paper examines the communication practice of China’s central bank and puts forward targeted policy suggestions to improve the expectation management of the central bank in the foreign exchange market.The main conclusions are as follows: Firstly,the central bank should consider the multiple effects brought by the intervention under the multi-target monetary policy when conducting prospective foreign exchange intervention,the multiple impacts on the fluctuations of base money supply,expected exchange rate,current account surplus,and domestic credit growth.Meanwhile,it should cultivate and guide rational expectations of investors and speculators.To give the market a clear and explicit signal to play a good role in expectation management,we should not only see the short-term effect of a policy measure but also predict the long-term effect,to realize the policy meets expectations.Secondly,China’s central bank foreign exchange market expectations management needs to balance the monetary base and stabilize the exchange rate stability,the central bank’s sterilizing intervention policy helps to keep the base money supply is stable,and expected intervention will intensify the exchange rate fluctuations in the short term,so the bank needs to strengthen the comprehensive use of various monetary policy tools in the future,And the implementation of expectation management can achieve better policy effects.Therefore the central bank needs to strengthen the comprehensive use of various monetary policy tools in the future,strengthen the transparency of the RMB exchange rate pricing mechanism and marketization degree,improve the effect of expected management policy,should pay attention to the foreign exchange market appeared irrational expectations,the central bank should be decisive and not arbitrary,strengthen the market in the form of "nudges" communication and expected to guide,The optimal target can be achieved by reducing the expected fluctuation of the RMB exchange rate by "convincing people with reason".Thirdly,through the empirical analysis of China’s central bank in foreign exchange markets foreign exchange intervention and communication of the specific work,found that both significantly influence and guide the RMB exchange rate expectations,giving play to the role across the cycle and the adjustment of countercyclical,central bank’s foreign exchange intervention can effectively reduce the expected volatility of RMB exchange rate,central bank intervention in foreign exchange in the short term effect is superior to the exchange rate communication,Exchange rate communication is better than foreign exchange intervention in the long run.However,the expected effects of the central bank’s foreign exchange market management are different in the two periods before and after the "8·11" exchange rate reform in 2015.Before the exchange rate reform,the exchange rate communication of the central bank increased the expected fluctuation of RMB exchange rate,and the foreign exchange intervention of the central bank also had a significant impact on the short-term expected fluctuation of RMB exchange rate.However,after the exchange rate reform,neither the exchange rate communication of the central bank nor the foreign exchange intervention was the cause of the expected fluctuation of RMB exchange rate.Short-term international capital flows have become an important factor leading to expected fluctuations of RMB exchange rate,and expectation management of foreign exchange market can be an important supplement to conventional monetary policy tools.In this paper,the main innovation points are as follows: Firstly,in the formation of the public faith manner as expected management breakthrough point,from four Angle information,policy,belief,communication management of expectations,the connotation of contrast analysis of the traditional inherent relations among the expected management and modern management logic,further enrich the existing forecast management theoretical basis.Secondly,the construction of the theoretical model of local equilibrium verifies the multiple effects of China’s central bank’s anticipatory foreign exchange intervention in the foreign exchange market and points out the limitations of China’s foreign exchange intervention.The EGARCH model is used to empirically study the impact of the central bank’s expectation management in the foreign exchange market on the expectation of the RMB exchange rate from two aspects of the mean equation and variance equation.Furthermore,the dynamic correlation between them is analyzed.Thirdly,to tie in with China’s interest rate liberalization and capital account openness,under the different processes of China’s central bank and different effects on the management of foreign exchange market expectations,built a New Keynesian DSGE model of an open economy,respectively,under the rules of quantitative type and price of monetary policy is simulation new crown since the outbreak of the global reality shock effect,Specifically including the expected error,household foreign currency bond scale and foreign central bank negative interest rate impact,the study of its transmission effect and mechanism on China’s main macroeconomic variables.At the same time,the central bank welfare loss analysis method is used to evaluate the effect of the expected management of the foreign exchange market.