Experimental Study On How Different Exchange Rate Regimes Affect Exchange Rate Expectations

Western classical exchange rate models all investigate exchange rate determination and exchange rate movements under assumption of some particular expectation formation mechanisms. If you change the expectation assumption of a model, the model will lead to different conclusions. Here comes the question. Which expectation assumption should be used? We know the assumptions of a model should be as realistic as possible. Then in real economy, in what way do foreign exchange market participants form their expectations? When exchange rate policies change, what will the expectations in foreign exchange market become of? These questions are not only of theoretical significance, but also of practical significance. There is heated debate on RMB exchange rate regime choice and exchange rate target, asserting that the Chinese government interferes too much in the RMB exchange rate. In fact, different exchange rate regimes correspond with different methods of foreign exchange intervention. In order to achieve the goal of maintaining RMB exchange rate stability, the Chinese central bank must follow appropriate foreign exchange intervention policies, so that China can stabilize RMB exchange rate, stabilize the market exchange rate expectations, and also enhance market confidence in the government's ability to maintain RMB exchange rate stability.This paper attempts to study these problems by experimental economics methods. We can obtain data on expectations directly through market experiments, which is easier and better, compared to the empirical research.After analyzing data of four treatments, which contain eight experiments, we get the main conclusions of this paper can be described as follows. Firstly, participants in the experimental market form exchange rate expectations using the extrapolative method, and the extrapolation coefficient is negative, indicating that the market exchange rate expectations are relatively stable. Secondly, when there is central bank intervention in the foreign exchange market, the absolute value of the extrapolation coefficient becomes significantly lower than when there is no central bank intervention, which means that the central bank plays an important role in maintaining exchange rate expectations, and in keeping the market confident in the currency value. Thirdly, whether there is expected exchange rate appreciation has no observable effects on the transaction price volatility in the foreign exchange market, the precision of exchange rate expectations, or exchange rate expectations formation mechanism.Based on the conclusions above, we believe that China should continue to implement appropriate management on the RMB exchange rate, and make this policy known to the public, so as to achieve the goal of maintaining RMB exchange rate stability.