Stochastic Regime Switching and Stabilizing Policies within Regimes

Karen Lewis

No 5289, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper describes a class of stochastic stabilizing policies within asset price regimes that can be easily incorporated into the framework of regime switching recently proposed by Froot and Obstfeld (1991). In contrast to previous treatments of market-driven fundamentals within the regime, authorities stochastically counteract movements in these fundamentals before asset prices reach boundary points. The paper describes how the stabilizing intra-regime intervention policies can be used to characterize the behavior of monetary authorities before fixing an exchange rate, as in the case studied by Flood and Garber (1983). An intervention policy within target zone bands consistent with empirical evidence is also a member of this class of policies. Furthermore, the stylized features of these intervention policies may be matched to actual data in a natural way.

JEL-codes: F31 G12 (search for similar items in EconPapers)
Date: 1995-10
Note: AP IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as International Journal of Finance and Economics, April 1996, vol.1, pp.71-86

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Journal Article: Stochastic Regime Switching and Stabilizing Policies within Regimes (1996)
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