Regime-switching in exchange rate policy and balance sheet effects

Norbert Fiess and Rashmi Shankar ()

No 3653, Policy Research Working Paper Series from The World Bank

Abstract: The authors apply regime-switching methods to a monetarist model of exchange rates and identify well-defined intervention policy cycles. The policy response indices include a standard exchange market pressure-based index and a model-based volatility ratio that is endogenized relative to Japan, assumed to be a"benchmark"floater. The authors find strong evidence that balance sheet effects, proxied by the stock ratio of external liabilities to assets, and economic performance, as measured by GDP and stock market indices, determine the cost of the regime shift. They use a panel of quarterly data from 1985 to 2004 for a sample of 15 countries, mostly in East Asia and Latin America.

Keywords: Economic Theory&Research; Economic Stabilization; Macroeconomic Management; Fiscal&Monetary Policy; Banks&Banking Reform (search for similar items in EconPapers)
Date: 2005-07-01
New Economics Papers: this item is included in nep-fmk, nep-ifn and nep-sea
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Citations: View citations in EconPapers (2)

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Working Paper: Regime-Switching in Exchange Rate Policy and Balance Sheet Effects (2005)
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