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Impact of renminbi exchange rate expectation on China’s foreign exchange reserves: an empirical analysis

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Compared with the previous researches giving scattered and qualitative discussions about the exchange rate expectation China’s foreign exchange reserves (FER), this paper conducted an empirical research by adding the exchange rate expectation. Starting from the evolution path of RMB exchange regime, two methods was used to examine the impact of expectation of RMB exchange rate on China’s FER. The first method was based on the rational expectation theory. Firstly, the sequence of rational expectations of RMB exchange rate was generated, after which combined the sequence with other major macroeconomic indicators as a whole to examine their effects on FER in different periods. In the second method, the indicator of NDF was directly used and the next step was the same as method one. Both of the results based on the two different methods mentioned above indicated that the change of expectation of RMB exchange rate positively correlated to FER.

Keywords: renminbi exchange rate, rational expectation, foreign exchange reserves, FER, sustainable economy

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