Research On RMB Exchange Rate Determination Mechanism In Perspective Of Heterogeneous Expectations

With the acceleration of financial opening in China,the role of the exchange rate is more and more important.The exchange rate not only has made a significant impact on the economy of the country,but also has become a tool for political games among nations.Plaza Accord in Japan is a warning to us.Under the current economic situation,it is of great significance to study the determination of RMB exchange rate because our current economic situation is similar to which in Japan at that time.Since the 90s of last century,the fact that the foreign exchange market is heterogeneous has been constantly verified.From the view of the foreign exchange market participants,all participants in the market determine the exchange rate.Therefore,from the perspective of the heterogeneity of traders’ expectations,this paper studies the mechanism of the exchange rate of the foreign exchange market participants in China.In Chinese foreign exchange market,there are investors such as governments,Chinese commercial banks,financial companies,foreign banks and individuals and so on.Some of them such as the government whose transactions in the foreign exchange market are not for profit can be called non-speculators.We call "non-speculators time"when non-speculators dominate speculators.The other part in the foreign exchange market is for the purpose of profit such as some individuals and institutions,we can call such investors speculators.We call "speculators time" when speculators dominate non-speculators.The regime of exchange rate expectation formed by speculators and non-speculators is different.This paper studies the determination of RMB exchange rate under the regime of speculators and non-speculators and the transition between two regimes.By using Markov Switching Model to estimate,we get the following conclusions:(1)Under the regime of speculators the exchange rate of RMB is mainly affected by the history of the exchange rate and the deviation from the fundamental exchange rate.Under the non-speculative regime,the exchange rate of RMB is mainly affected by the deviation from the middle price.The volatility of exchange rate in the regime of speculators is more than which in the regime of non-speculators;(2)In different RMB exchange rates the duration of the two regimes in different RMB exchange rates is different.For the RMB against the U.S.dollar and the Japanese yen,the duration of the non-speculator regime is longer.The duration of the two regimes is nearly the same for the RMB exchange rate against the Euro.For the exchange rate of RMB against the British pound,the duration of the speculator regime is longer than the non-speculative regime;(3)Short-term spread between China and foreign countries is the main factor affecting the short-term fundamental exchange rate which indicates that the link between China’s interest rate and exchange rate has been constantly strengthened.