A Study On The Effect Of Inflation Expectation And Inflation On Exchange Rate

Inflation expectations are different from inflation,and inflation expectations are the public's psychological expectations of inflation,rather than real economic data.This paper compares the expected formation mechanism of the four hypotheses and chooses the rational expectation hypothesis as the basis for predicting the expected inflation data,and uses the state space model to estimate China's inflation expectations.With the global economic environment and the proliferation of monetary policy intensified,the volatility of the RMB exchange rate suddenly increased,it used to be the previous unilateral,but now it trends into a two-way volatility.The unpredictability of China's real economy and its exchange rate trend increase the risk of stable development.It is noteworthy that,for open economies,the goal of price stability is difficult to reconcile with the goal of exchange rate stability in both the new inflation targeting system and the traditional money supply intermediate target system.Because in the money supply intermediate target system,the monetary authorities regulate the money supply to adjust the domestic price level.According to the theory of purchasing power parity,inflation rate can affect the exchange rate by influencing the value of money under the condition of paper currency circulation.Therefore,in the traditional monetary policy framework,monetary policy will regulate inflation rate through the post-control and then affect the exchange rate trend.In addition,under the inflation targeting system,there is no intermediate target between the policy tool and the ultimate goal,and the monetary authorities manage the price level through the gap between the previously forecasted inflation rate and the target inflation rate,so as to make the actual inflation rate close to the target Inflation rate.From the perspective of maintaining price stability and relative stability of exchange rate,we built a vector auto-regression model to analyze and compare the impact of inflation rate and inflation expectation on RMB exchange rate volatility.The result shows that the exchange rate volatility caused by the expected inflation is much smaller than the exchange rate volatility caused by the inflation.Therefore,from the perspective of maintaining price stability and relative stability of exchange rate,the inflation targeting monetary policy framework is better than the traditional monetary policy framework.