Estimation of Nonlinear Exchange Rate Dynamics in Evolving Regimes

Jeffrey Frankel, Yao Hou and Danxia Xie

No 32644, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a new econometric framework to estimate and classify exchange rate regimes. They are classified into four distinct categories: fixed exchange rates, BBC (band, basket and crawl), managed floating, and freely floating. The procedure captures the patterns of exchange rate dynamics and the interventions by authorities under each of the regimes. We pay particular attention to the BBC and offer a new approach to parameter estimation by utilizing a three-regime Threshold Auto Regressive (TAR) model to reveal the nonlinear nature of exchange rate dynamics. We further extend our benchmark framework to allow the evolution of exchange rate regimes over time by adopting the minimum description length (MDL) principle, to overcome the challenge of simultaneous two-dimensional inference of nonlinearity in the state dimension and structural breaks in the time dimension. We apply our framework to 26 countries. The results suggest that exchange rate dynamics under different regimes are well captured by our new framework.

JEL-codes: F31 F33 (search for similar items in EconPapers)
Date: 2024-07
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
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Working Paper: Estimation of Nonlinear Exchange Rate Dynamics in Evolving Regimes (2023)
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