Analysis Of The Impact Of Exchange Rate Communication Of The Central Bank On Market Exchange Rate Expectations

The reform of exchange rate formation mechanism is a hot topic in China's foreign exchange market in recent years.Since the restart of exchange rate reform in 2010,the process of exchange rate marketization has accelerated.The central bank takes strengthening the flexibility of RMB exchange rate and promoting the two-way floating of exchange rate as an important goal.At the same time,the continuous promotion of RMB internationalization also puts forward higher requirements for the exchange rate formation mechanism of our country,which requires the market factor to play a greater role in the exchange rate formation process.The traditional direct intervention will not only bring problems such as foreign exchange occupation or excessive consumption of foreign exchange reserves,but also is not conducive to the promotion of the marketization process,so its status is gradually declining.In this context,exchange rate communication,a new means of exchange rate regulation,has gradually become a favorite of the central bank.Exchange rate communication refers to the way in which authorities or media communicate their views on exchange rate trend,mechanism reform,policy outlook,etc.to adjust market traders' exchange rate expectations,and then influence their behaviors to adjust the exchange rate.Compared with the traditional direct intervention,exchange rate communication has lower operating cost and shorter time lag.The central bank considers using exchange rate communication as a supplement to the traditional intervention policy,which can reduce the use of foreign exchange reserves,better control the money supply and manage inflation.We find that in recent years,the central bank not only conveys information to the market through "shouting" when the exchange rate fluctuates greatly,but also when the market exchange rate is stable,the central bank officials release their opinions on the foreign exchange market and the central bank's objectives in the "Two Sessions" and Economic Forum and other occasions.The frequency of using the communication method is significantly higher than in the past,which shows that China's exchange rate regulation method is gradually changing from direct to indirect.This is also an important embodiment of gradually promoting and improving the reform of exchange rate marketization.From the current trend,in the future,the frequency of central bank's adjusting exchange rate expectations through communication will gradually increase.It is of great significance to study this new intervention mode for both predicting the level of exchange rate expectations and clarifying the degree of exchange rate expectations volatility.This paper studies the impact of exchange rate communication on market exchange rate expectations from three perspectives:literature review,theoretical analysis and empirical analysis.In the empirical study,using the data from June 2010 to August 2019,and use the EGARCH model to analyze the effect of oral communication behavior and written communication behavior on adjusting exchange rate expectations under the daily frequency and monthly frequency,and compare the effect of direct intervention and communication behavior.In addition,by studying the influence of communication behavior on correcting the deviation of exchange rate expectation from fundamentals,the paper demonstrates the role of communication behavior in enhancing market rationality,and finally tests the channel of the effect of communication behavior.This study shows that oral communication and written communication have different effects on the daily frequency and monthly frequency.Under the daily frequency,oral communication and written communication have significant impact on the level of exchange rate expectations,and oral communication is more effective,but both of them can not effectively adjust the fluctuation of exchange rate expectations.Under the monthly frequency,both ways of communication can promote the level of exchange rate expectations to change in the desired direction,and can also enlarge the fluctuation degree of the exchange rate expectations.Among them,oral communication is more effective for adjusting the level of exchange rate expectations,while written communication is more effective for enhancing the elasticity of the exchange rate expectations,and direct intervention has no satisfactory effect on the level and volatility of exchange rate expectations.Therefore,compared with communication,the effect of direct intervention is declining.In addition,compared with other central bank officials,the communication from central bank governor can more effectively adjust the level and volatility of exchange rate expectations.When the exchange rate expectation deviates from the fundamental level,the communication behavior can promote the exchange rate expectation to return to the fundamental level,reduce the degree of deviation,and enhance the rationality of the market.In addition,communication behavior plays a role through the channel of coordination.In order to further enhance the effectiveness of exchange rate communication,the central bank needs to improve the accuracy of communication information,and strengthen the objectivity of media reports on communication events.In addition,it can enhance the cooperation of communication behavior of different identity communicators such as central bank governor and others,and improve the rationality of foreign exchange market participants,so that market participants can better understand and use the communication content.