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

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.