Market Expectations and RMB Exchange Rate Policies
Project Description
This project investigates how the central parity mechanism of the PBC affects market expectations during 2014-2022.
A distinct feature of China’s managed floating regime is the central parity mechanism: each morning before the trading day, the PBC forms and announces a central parity rate (CPR), around which a tight daily band is set to allow the RMB exchange rate to fluctuate within.
During the period of our interest, the central parity mechanism had two important policy reforms. The first one occurred during 2015 when PBC in August announced a change of the CPR to be more market-determined and in December provided a clear guidance that the CPR would be based on the “previous closing rate plus changes in the currency basket”. The second one occurred during 2017 when a “counter-cyclical” factor was added to determine the CPR, with the objective of reducing “irrational” depreciation expectations and “pro-cyclical” herding behavior. This “counter-cyclical” factor was then repeatedly de-activated and re-activated.
The goal of the project is to identify empirical patterns of how market forecsts of USD/RMB exchange rate respond to the CPR dynamics and the associated policy reforms.
A distinct feature of China’s managed floating regime is the central parity mechanism: each morning before the trading day, the PBC forms and announces a central parity rate (CPR), around which a tight daily band is set to allow the RMB exchange rate to fluctuate within.
During the period of our interest, the central parity mechanism had two important policy reforms. The first one occurred during 2015 when PBC in August announced a change of the CPR to be more market-determined and in December provided a clear guidance that the CPR would be based on the “previous closing rate plus changes in the currency basket”. The second one occurred during 2017 when a “counter-cyclical” factor was added to determine the CPR, with the objective of reducing “irrational” depreciation expectations and “pro-cyclical” herding behavior. This “counter-cyclical” factor was then repeatedly de-activated and re-activated.
The goal of the project is to identify empirical patterns of how market forecsts of USD/RMB exchange rate respond to the CPR dynamics and the associated policy reforms.
Supervisor
LU, Yang
Quota
4
Course type
UROP1000
UROP1100
UROP2100
UROP3100
UROP4100
Applicant's Roles
Under the guidance of the professor, the students are expected to
1) organize and visualize a dataset on the economists' forecasts of USD/RMB exchange rate
2) identify patterns of the forecast data using statistical tools
3) read literature on exchange rate and market expectations
4) conduct regression analysis using Python, R, Stata, or Matlab.
The students should have some knowledge and experience on econometrics and coding.
1) organize and visualize a dataset on the economists' forecasts of USD/RMB exchange rate
2) identify patterns of the forecast data using statistical tools
3) read literature on exchange rate and market expectations
4) conduct regression analysis using Python, R, Stata, or Matlab.
The students should have some knowledge and experience on econometrics and coding.
Applicant's Learning Objectives
1) to gain hands-on experience of conducting primary research
2) to acquire practical skills of data analytics
3) to gain exposure to the frontier of the literature on exchange rate and market expectation
2) to acquire practical skills of data analytics
3) to gain exposure to the frontier of the literature on exchange rate and market expectation
Complexity of the project
Challenging