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Speculative capital inflows, adaptive expectations, and the optimal renminbi appreciation policy

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  • Li, Mei
  • Qiu, Junfeng

Abstract

This paper examines empirical evidence of the adaptive learning behavior of speculators in the 2005–2008 renminbi appreciation episode, and establishes a theoretical model to explore appreciation policy implications of such a behavior. In our model, speculators form their expectations about the future appreciation premium adaptively by extrapolating past appreciation returns into the future. We find that a rapid appreciation may attract more capital inflows, and the central bank may prefer a slow appreciation to discourage capital inflows. Simulated results can generate hump-shaped paths of the appreciation speed, expected appreciation premium, and capital inflows. In addition, changes in the appreciation speed precede changes in the expected appreciation premium and capital inflows. These results are consistent with empirical evidence in the 2005–2008 renminbi appreciation episode.

Suggested Citation

  • Li, Mei & Qiu, Junfeng, 2013. "Speculative capital inflows, adaptive expectations, and the optimal renminbi appreciation policy," China Economic Review, Elsevier, vol. 25(C), pages 117-138.
    • Handle: RePEc:eee:chieco:v:25:y:2013:i:c:p:117-138
    DOI: 10.1016/j.chieco.2012.05.008
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    More about this item

    Keywords

    Adaptive expectations; Renminbi appreciation; Speculative capital;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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