Analysis On The Influence Mechanism And Effect Of Exchange Rate Communication On Exchange Rate Expectation

Based on the relevant theories of exchange rate communication and heterogeneous agent exchange rate expectation formation theory,this paper divides market participants into institutional investors and individual investors.Then,this paper analyzes the differential mechanism of exchange rate communication on two kinds of participants' exchange rate expectations theoretically,carries on the empirical analysis on the influence mechanism and effect of exchange rate communication on both exchange rate expectations.For institutional investors,this paper applies the survey data of RMB exchange rate expectations released by Bloomberg,firstly verifies the formation rules of institutional investors exchange rate expectations,the results show that institutional investors comprehensively apply technical rules,fundamental rules and arbitrage rules to make exchange rate expectations,and examines the impact of exchange rate communication on institutional investors' exchange rate expectations by the tools of Variable Coefficient Panel Data Model.The results show that exchange rate communication has a significant and desirable policy effect on expectation,which could impacts expectations of more than 50% institutions.Further,The Autoregressive Distributed Lag Model is adopted to verify whether exchange rate communication can reduce the heterogeneity of institutional investors' exchange rate expectations,the empirical results show that the increase of exchange rate communication's frequency will enlarge the heterogeneity,and when the depreciation of exchange rate,the effect of direct intervention is also desirable.This proves that exchange rate communication does its work through signal channels.For individual investors,this paper applies the ratio of foreign exchange settlement and sale by a bank on behalf of a customer for individual investors rate expectations index,firstly examines the formation rules of individual investors' exchange rate expectations,the results show that the individual investors use simple extrapolation rules and adaptive rules to predict exchange rate.Further,the GARCH model is adopted to verify the impact mechanism and effect of exchange rate communication on individual investors' exchange rate expectation.The results show that the exchange rate communication can make the level of exchange rate expectations of individual investors move to the central bank's desired direction,and stabilize the exchange rate expectation by suppressing the sentiment of individual investors.In conclusion,exchange rate communication is effective for the exchange rate expectations of both participants,while the mechanism is different.Therefore,for institutional investors,when the RMB is appreciating or near the equilibrium level,the central bank can mainly use exchange rate communication to influence market expectations and thus guide the exchange rate trend.In case of substantial depreciation of the exchange rate,the central bank should simultaneously use exchange rate communication and direct intervention to reverse the depreciation of exchange rate expectation and smooth the sharp fluctuations of the exchange rate.For individual investors,when the exchange rate fluctuates significantly,the central bank can calm the fluctuations of individual investors' emotion through strengthen communication,so as to stabilize the foreign exchange market and make the exchange rate expectation moves to the desired direction of the policy authorities.