In other words, the discovery of exchange rate fluctuation under the floating exchange rate system is regarded as an expansion effect and an explanation of the elastic price monetary analysis method determined by exchange rate. According to this theory, the exchange rate is the relative price of the two countries' currencies, so the exchange rate is determined by the demand and supply of the money stock. Because money demand is a function of actual income, price level and nominal interest rate level, when the money market is balanced, the exchange rate is determined by income level, price level and interest rate level. Under the condition of rational expectation, the current exchange rate is the sum of all the "discounted values" of basic economic factors such as money supply, income level, interest rate level and price level in the future. If the economic parties expect that the basic economic factors such as money supply and income level will change in the future, the current exchange rate will change even if the basic economic factors such as money supply and income level remain unchanged.
The second is "overshoot effect theory". Overshoot generally means that for a given disturbance, the short-term response of a variable exceeds its long-term response, and then the opposite adjustment process will occur. The mechanism of overshoot is the oscillation effect caused by monotonic change, and the fundamental reason for this phenomenon is that the continuous change of stock requires temporary change of flow. Overshoot is a common feature of asset prices, but it has attracted the attention of foreign exchange market. Castle noticed the overshoot of the foreign exchange market in the 1920s, but he didn't systematically analyze this phenomenon. The exchange rate overshoot model of the first system was put forward by Dornbusch in 1976, and the proof of exchange rate overshoot basically borrowed from the Rachel theorem in chemistry. The theory of exchange rate overshoot borrows this theorem and holds that exchange rate overshoot is actually a compensation behavior. Overshoot models assume that some nominal variables are fixed (or fixed) in the short term. For example, McKinnon assumes that the foreign exchange market lacks enough speculative funds, Frank thinks that new information has different effects on the commodity market and the asset market, and Bronson thinks that asset owners can't quickly restore the balance of their portfolios in the face of external disturbances. In Dornbush's overshoot model, it is assumed that the price is sticky in the short term and the purchasing power parity is not established in the short term. Therefore, the asset market can be adjusted quickly, while the commodity market is relatively slow. The adjustment process of the economic system is carried out through asset prices, that is, short-term interest rates and exchange rates. Assuming that the money supply increases, under the condition of price stickiness, it will immediately cause the real balance to rise and the domestic interest rate to fall, while the domestic interest rate will lead to capital outflow and currency depreciation. Because the interest rate parity condition without offset is always established, the decline of domestic interest rate will produce the expectation of future currency appreciation. Considering the expectation of future appreciation, the extent of currency depreciation must exceed the long-term equilibrium value determined by purchasing power parity. Therefore, in the short term, the exchange rate exceeds its long-term equilibrium value. However, with the decline of interest rates and currency depreciation, there will be an oversupply in the commodity market, which will push up the price level, thus reducing the domestic currency balance, increasing domestic interest rates, capital inflows and currency appreciation, and the economic system will gradually reach a long-term equilibrium level. Therefore, in a general sense, exchange rate overshoot means that the short-term response of the exchange rate exceeds its long-term equilibrium value for a given external disturbance, and then the opposite adjustment process occurs, and the exchange rate will eventually return to its long-term equilibrium value. Therefore, according to the overshoot theory, exchange rate fluctuation is a short-term behavior in the process of dynamic adjustment of exchange rate.
The third is "speculative bubble theory". According to the asset market analysis method determined by exchange rate, even if the basic economic factors such as money supply and income level have not changed, the exchange rate will change as long as it is expected to change. Once the exchange rate changes away from the basic factors, it is expected to strengthen itself and form a speculative bubble. The speculative bubble in the foreign exchange market is an exchange rate rise that cannot be explained by basic factors. The speculative bubble mainly depends on some market psychological factors. Speculative bubbles are rational bubbles. If speculators are fully aware of the market equilibrium exchange rate determined by basic economic factors, even if the current exchange rate is higher than the equilibrium exchange rate, as long as the exchange rate rises in the future, the risks borne by speculators can be compensated. Speculators are also rational in buying because they know that prices will return to equilibrium one day. If all speculators expect this, there may be bubbles in every period. Once a bubble is formed, the exchange rate will rise faster and faster, because the exchange rate must rise faster to compensate for the risks taken by speculators. The existence of speculative bubbles shows that the exchange rate may be completely divorced from basic economic factors, resulting in a self-strengthening movement. The fourth is the "currency substitution theory".
Currency substitution theory holds that under the floating exchange rate system, economic parties will hold foreign currencies for trading motives, speculative motives and preventive motives. The main reason for currency substitution is that multinational companies produce and operate in different countries, and they have a strong motivation to diversify their cash balances, so as to facilitate their operations in different countries and reduce transaction costs. At the same time, speculators gain profits by buying and selling currencies, and they also have to hold foreign currencies in order to obtain more liquid foreign funds and exchange them with other currencies conveniently. In addition, the central bank also holds international reserves expressed in foreign currencies to intervene in the foreign exchange market and stabilize the exchange rate and macro-economy. Therefore, under the floating exchange rate system, economic parties have the incentive to hold a basket of currencies to reduce the risks brought by exchange rate changes. The proportion of various currencies in the monetary asset portfolio changes with the changes of risks and returns of various currencies. With the relaxation of foreign exchange control in various countries, currency substitution has become a common phenomenon under the floating exchange rate system. The substitution between existing currency and foreign currency increases the pressure of currency depreciation and appreciation. The higher the elasticity of currency substitution, the more unstable the exchange rate is, because under the condition of high elasticity of currency substitution, the smaller the growth rate of money supply, the greater the exchange rate will change. Therefore, currency substitution will aggravate exchange rate fluctuations and make exchange rate fluctuations even greater.
The fifth is the "news" theory. The "news" theory of exchange rate determination holds that in the foreign exchange market, new information can cause expected changes, and the expected changes can be quickly reflected in the exchange rate. Therefore, new information plays a decisive role in exchange rate changes. This new information is "news", which means unpredictable events. Common "news" affecting exchange rate changes include the publication of economic statistics, political events, new international monetary arrangements, rumors and so on. Because "news" is an unpredictable event, the exchange rate changes related to "news" are unpredictable. The reaction of foreign exchange market to information does not depend on whether the information is "good" or "bad", but on whether the information is "good" or "bad" than expected. Expected information has been included in the current market exchange rate, and the exchange rate only responds to unexpected information. For example, when the government publishes statistics such as money supply and trade balance, the change of market exchange rate does not depend on the size of these statistics, but on the difference between these statistics and people's expectations in advance. This kind of "news" will affect the change of exchange rate. The "news" theory of exchange rate determination reflects the essential characteristics of exchange rate. Exchange rate is a kind of asset price, which is determined by the asset market and has volatility and unpredictability. In the asset market, liquid assets reflect the expectation of future events, which can respond quickly to new information, so volatility is an inherent characteristic of asset prices. The sixth is "irrational expectation theory". According to this theory, not all expectations in the foreign exchange market are rational. Judging from the actual situation of foreign exchange market transactions, there is sufficient evidence to prove the various expectations of the foreign exchange market. According to new york Federal Reserve Bank's statistics on foreign exchange market transactions, the daily foreign exchange transaction volume in the world is as high as 430 billion US dollars. The report of the Federal Reserve Bank of the United States also shows that only 4.9% of transactions are conducted between non-financial institutions and 4.4% are conducted between non-banks. Therefore, the transactions in the foreign exchange market are mainly between banks, and the volume of transactions is increasing, indicating that there are various expectations in the market, otherwise there would not be such a large volume of transactions, so the expectations in the foreign exchange market are not all rational. In the foreign exchange market, different forecasting methods lead to different expectations.
In foreign exchange trading, the commonly used forecasting methods include basic analysis and technical analysis. The so-called basic analysis refers to analyzing the basic factors of exchange rate changes, including money supply, interest rate level, price level and other factors, to analyze the trend of exchange rate movement. The prediction of various asset market analysis methods based on exchange rate determination is basic analysis. Basic analysis calculates the equilibrium value of exchange rate according to the given exchange rate model. When the market exchange rate deviates from the equilibrium exchange rate, basic analysts expect that the exchange rate will eventually return to the equilibrium exchange rate level, which is a source of exchange rate stability. Technical analysis, also known as chart analysis, refers to predicting the future exchange rate movement trend by analyzing the past exchange rate changes. The methods commonly used by chart analysts include moving average analysis, momentum analysis and so on. A common feature of these methods is that when the market index (exchange rate index, trading volume or specific rate of exchange rate change) rises from a low point to a certain proportion, traders expect the exchange rate to continue to rise, and when the market index falls from a high point to a certain extent, traders expect the exchange rate to continue to fall. Chart analysts' expectations are called "wave effect", which is a source of exchange rate instability. Because the information used in technical analysis is only the past exchange rate changes, rational expectation requires all parties to use all relevant information to predict future exchange rate changes, so all relevant information is used to predict future exchange rate changes.
Exchange rate fluctuation under the floating exchange rate system will have a very negative impact on economic development, and RMB exchange rate fluctuation will have a great impact on economic and financial stability, which is not in the fundamental interests of China. China's exchange rate system is not yet free to float. At present, the global economy is not balanced, unstable factors still exist, and there will be more adjustments in the future. At the same time, international capital is highly mobile, and China's economic system can't afford drastic disorderly adjustment. Theoretically speaking, China's economic system reform not only emphasizes that the market plays a fundamental role in resource allocation, but also emphasizes macro management. Therefore, the exchange rate system should also be a managed floating mechanism.