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

Author

Listed:
  • LI Tiandong

    (Institute for Financial Studies, Fudan University, Shanghai, 200433, China)

  • XUE Shaoqiang

    (The Economic School, Fudan University, Shanghai, 200433, China)

  • ZHU Qi

    (The State Administration of Foreign Exchange, Beijing, 100037, China)

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.

Suggested Citation

  • LI Tiandong & XUE Shaoqiang & ZHU Qi, 2006. "The directions of FDI and the self-intensifying expectations of the exchange rate and the effectiveness of sterilized intervention," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 1(2), pages 207-219, June.
    • Handle: RePEc:fec:journl:v:1:y:2006:i:2:p:207-219
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    File URL: http://journal.hep.com.cn/fec/EN/10.1007/s11459-006-0005-6
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    More about this item

    Keywords

    FDI; expectations; sterilized intervention;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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