The directions of FDI and the self-intensifying expectations of the exchange rate and the effectiveness of sterilized intervention

Tiandong Li (), Shaoqiang Xue and Qi Zhu
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Tiandong Li: Institute for Financial Studies, Fudan University, Shanghai, 200433, China
Shaoqiang Xue: The Economic School, Fudan University, Shanghai, 200433, China
Qi Zhu: The State Administration of Foreign Exchange, Beijing, 100037, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2006, vol. 1, issue 2, 207-219

Abstract: In this paper, we develop the Renminbi s dynamic model to analyze the relationship between the flow directions of foreign direct investment (FDI) and the exchange rate s expectations on the basis of distinguishing the real interest rate from the desired interest rate. We find that the exchange rate expectation has a self-intensifying mechanism, which could have a reverse effect on the country s macroeconomic stabilization. We discuss the issue on how expectation impacts the macro economy and then analyze the conditions of successful intervention, which is helpful for policy management.

Keywords: FDI; expectations; sterilized intervention (search for similar items in EconPapers)
JEL-codes: E61 F31 (search for similar items in EconPapers)
Date: 2006
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