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Adaptive learning expectation, intermediate exchange rate regime, and monetary autonomy: Evidence from China

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  • Chen, Qiang
  • Yin, Zechen
  • Zhang, Shuai

Abstract

This paper investigates emerging market economies’ unique exchange rate expectations, intermediate exchange rate regimes, and their impacts on welfare and monetary policy autonomy. Using China’s 1998–2022 data, we develop a macroeconomic model, which incorporates agents’ adaptive learning to simulate policy transmission with varying degrees of capital control level and exchange rate stability weight. Results show moderate capital controls with certain degrees of floating exchange rate enhance welfare without compromising monetary autonomy. Adaptive learning expectations change the countercyclical accumulation of foreign exchange reserves, limit the central bank’s intervention scope, and weaken market mechanisms. This requires a closer Taylor rule — intervention rule integration, which may hurt monetary policy autonomy. For economies with less transparent monetary frameworks and newly opened capital accounts, combining moderate exchange rate stability with controlled capital liberalization minimizes autonomy loss from external interest rate and shocks aids precise institutional design.

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  • Chen, Qiang & Yin, Zechen & Zhang, Shuai, 2025. "Adaptive learning expectation, intermediate exchange rate regime, and monetary autonomy: Evidence from China," Economic Modelling, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:ecmode:v:151:y:2025:i:c:s0264999325002044
    DOI: 10.1016/j.econmod.2025.107209
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