The Two Pillar Policy for RMB and Market Expectation “双支柱”的人民币汇率政策与市场预期

The RMB exchange rate policy is governed by a two-pillar rule. This paper presents novel evidence of regime-switching in the policy coefficient on the market pillar, but not on the basket pillar. The switching is closely tied to the implementation of the counter-cyclical factor (CCF) policy, which is designed to address market irrationality. The frequency of regime-switching is significantly higher than what is officially announced, suggesting that the de facto policy differs from the de jure policy. Using a simple model, this paper demonstrates that the regime-switching policy has an expectation formation effect and allows the CCF policy to effectively prevent self-fulfilling depreciation and achieve its objective. Yet, the de jure CCF policy is unable to stabilize the RMB exchange market due to its weak expectation effect.