A structural threshold model of the exchange rate under optimal intervention

Hsiu-Yun Lee and Hung-pin Lai

Journal of International Money and Finance, 2011, vol. 30, issue 6, 931-946

Abstract: By considering a social trade-off between targeting the exchange rate and minimizing intervention costs, nonlinear exchange rate dynamics can be captured by a structural threshold model. This article provides a theory-based empirical exchange rate model and shows how to put the model into an empirical investigation. To estimate the structural threshold model, we propose a two-step procedure which separately estimates the permanent and temporary fundamentals of the foreign exchange market. A demonstration of our approach is applied to 1981Q3-2008Q3 Taiwan's foreign exchange market, with a brief review of its monetary policies and central bank given prior. Estimation results are consistent with theoretical predictions and many intervention operations of Taiwan's central bank are successfully identified.

Keywords: Structural; threshold; model; Exchange; rate; Managed; float; Intervention (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:30:y:2011:i:6:p:931-946

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