Exchange rate stability and expectation management under heterogeneous expectations

Xiaoping Li, Nan Wang, Jihong Duan and Wenming Shi

International Review of Financial Analysis, 2024, vol. 95, issue PB

Abstract: This study develops a heterogeneous agent model comprising fundamentalists, chartists, carry traders, and stabilizers to determine the RMB exchange rate. The stabilizers act as agents of the central bank and relevant government agencies to manage expectations when the exchange rate appreciates or depreciates excessively. Using the unscented Kalman filter method, our study finds that the principal parameters of the heterogeneous agent model are statistically and economically significant, and the heterogeneous agent model can adequately characterize the main features of expectation management. Furthermore, the stabilizers can significantly reduce excess volatility and promote market exchange rates to their fundamental values. Additionally, the timing of the stabilizers' actions is consistent with that of the central bank's implementation of expectation management.

Keywords: Stabilizers; Expectation management; The CNH-CNY spread; The heterogeneous agent model; The unscented Kalman filter (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:95:y:2024:i:pb:s1057521924003855

DOI: 10.1016/j.irfa.2024.103453

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