Exchange Rate Dynamics Under Stochastic Regime Shifts: A Unified Approach

Kenneth Froot and Maurice Obstfeld

No 522, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Simple techniques of regulated Brownian motion are used to analyse the behaviour of the exchange rate when official policy reaction functions are subject to future stochastic changes. We examine exchange rate dynamics in cases where the authorities promise (i) to confine a floating rate within a predetermined range, (ii) to peg the currency once it reaches a predetermined future level, and (iii) to unify a system of dual exchange rates. Similarities between these and several related examples of regime switching are stressed. We also discuss how stochastic regime changes can affect some standard statistical tests of hypotheses about exchange rates.

Keywords: Regime Change; Regulated Brownian Motion; Target Zone (search for similar items in EconPapers)
Date: 1991-02
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Related works:
Journal Article: Exchange-rate dynamics under stochastic regime shifts: A unified approach (1991)
Working Paper: Exchange Rate Dynamics Under Stochastic Regime Shifts: A Unified Approach (1989)
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