Expectation Formation Mechanism Of Renminbi Exchange Rate

This thesis is on the basis of the fact that Renminbi was expected from depreciation to appreciation in the past ten years. It explores the characteristics of exchange rate expectation formation mechanism of renminbi, and also analyzes the relation between the characteristic of inertial band-wagon of expectation and balanced moving of macro-economy. The characteristic of inertial band-wagon means destabilization of expectation. The thesis believes there will be important theoretic meaning and practical meaning in researching this problem of Renminbi under the policy of stabilizing Renminbi exchange rate fundamentally.From Asian Financial Crisis of 1997 to July 2005, China had Renminbi exchange rate pegged US dollar. In fact, Renminbi exchange rate can't adjust the disequilibrium of external economy. In this period, the expectation change of RMB exchange rate was out of the ordinary. After 1997, RMB exchange rate dropped into depreciation expectation, but the exchange rate kept stable because Chinese government will not depreciate RMB. Current account and foreign direct investment was affected, but still maintained surplus. Until 2001, Japanese government believed China can maintain trade surplus because of RMB exchange rate. Then RMB turned into appreciation expectation. From economic data, the surplus of current account and FDI went up and down as the same direction as the exchange rate expectation. It maybe tells us the expectation affected the real economy instead of nominal exchange rate. From this phenomenon, the thesis wants to find a new road to the destination of balance of payment and macro economy equilibrium through discovering RMB exchange rate expectation formation mechanism.Keeping RMB stable basically is main key of exchange rate policy of China. Through exchange rate formation mechanism, expectation influences stability of exchange rate, and then macro economy. The logic gives the research of RMB expectation practical significance. Exchange rate mechanism is the mechanism of supply and demand in foreign exchange market. Expectation directs market behavior, and then forms foreign exchange supply and demand in the market, and then forms the exchange rate. We can see the important role of expectation in this logic.In theoretic research, expectation variable must enter into the model of exchange rate formation mechanism. Any famous model about exchange rate was on the premise of certain expectation hypothesis, but there were no special prove on this hypothesis. The theoretic model and result will be criticized as soon as the hypothesis was denied. So RMB exchange rate expectation formation mechanism research has important practical and theoretic meanings. Researching RMB exchange rate expectation formation mechanism is the theoretic forerunner in structuring RMB exchange rate model and researching RMB exchange rate problem.On the basis of contrasting models and empirical test in the past research, this thesis picks out Flexible Price Monetary model as Renminbi exchange rate model. Because Renminbi exchange rate expectation can't be measured, I can't test it directly. I gain the corresponding functions of the five kinds of expectation formation mechanism and simulate the model in OLS by 31 seasonal samples. I get the conclusion of the characteristics of band-wagon and equilibrium regression of the expectation.Band-wagon means the destabilization of expectation. The other focal point of this thesis is the change of national economy influenced by the band-wagon expectation. Appreciation expectation is an example to analyze this problem under a compound macroeconomic model constructed in this thesis. Under the band-wagon expectation, we can find out the route of the equilibrium point of macro-economy. Interest rate can't have the function on adjusting economy under fixed exchange rate, and we can also get the same conclusion in intermediate regime. The dilemma of rate puts policy taken by government into difficulty. We give empirical analysis about china on it.How to steady the expectation of Reminbi exchange rate? The thesis gives some advice in institution. There are two key factors including foreign exchange rate regime and foreign exchange market developing pattern. We must change the institution rigidity and develop national foreign exchange market in order to spread the information and diversify the expectation.In theoretic innovation, there are two aspects in this part. One is a new train of thought in researching exchange rate expectation through embedding different formation mechanism of expectation in the model picked out before; the other is a compound macroeconomic model in which the relation between exchange rate expectation and macroeconomic equilibrium was discussed.