The Regime-Switching Policy for the RMB

56 Pages Posted: 28 Mar 2022 Last revised: 14 Aug 2023

See all articles by Sihao Chen

Sihao Chen

Hong Kong Baptist University

Shi Qiu

Fudan University - School of Economics

Date Written: August 14, 2023

Abstract

The RMB exchange rate policy is governed by a two-pillar rule. This paper presents novel evidence of regime-switching in the policy coefficient on the market pillar, but not on the basket pillar. The switching is closely tied to the implementation of the counter-cyclical factor (CCF) policy, which is designed to address market irrationality. The frequency of regime-switching is significantly higher than what is officially announced, suggesting that the de facto policy differs from the de jure policy. Using a simple model, this paper demonstrates that the regime-switching policy has an expectation formation effect and allows the CCF policy to effectively prevent self-fulfilling depreciation and achieve its objective. Yet, the de jure CCF policy is unable to stabilize the RMB exchange market due to its weak expectation effect.

Keywords: Regime-switch, Exchange Rate, RMB Central Parity, Counter- cyclical Factor

JEL Classification: C13, C32, E58, F31

Suggested Citation

Chen, Sihao and Qiu, Shi, The Regime-Switching Policy for the RMB (August 14, 2023). Available at SSRN: https://ssrn.com/abstract=4044671 or http://dx.doi.org/10.2139/ssrn.4044671

Sihao Chen

Hong Kong Baptist University ( email )

Renfrew Road 34
Kowloon Tong
Hong Kong

Shi Qiu (Contact Author)

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

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