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Estimation of De Facto Flexibility Parameter and Basket Weights in Evolving Exchange Rate Regimes

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  • Jeffrey Frankel
  • Daniel Xie

Abstract

A new technique for estimating countries’ de facto exchange rate regimes synthesizes two approaches. One approach estimates the implicit de facto basket weights in an OLS regression of the local currency value rate against major currency values. Here the hypothesis is a basket peg with little flexibility. The second estimates the de facto degree of exchange rate flexibility by observing how exchange market pressure is allowed to show up. Here the hypothesis is an anchor to the dollar or some other single major currency, but with a possibly substantial degree of exchange rate flexibility around that anchor. It is important to have available a technique that can cover both dimensions: inferring anchor weights and the flexibility parameter. We test the synthesis technique on a variety of fixers, floaters, and basket peggers. We find that real world data demand a statistical technique that allows parameters and regimes to shift frequently. Accordingly we here take the next step in estimation of de facto exchange rate regimes: endogenous estimation of parameter breakpoints, following Bai and Perron.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.2.568
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 100 (2010)
Issue (Month): 2 (May)
Pages: 568-72

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Handle: RePEc:aea:aecrev:v:100:y:2010:i:2:p:568-72

Note: DOI: 10.1257/aer.100.2.568
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  1. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  2. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-48, September.
  3. Jeffrey A. Frankel & Shang-Jin Wei, 2008. "Estimation of De Facto Exchange Rate Regimes: Synthesis of the Techniques for Inferring Flexibility and Basket Weights," NBER Working Papers 14016, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. C. Randall Henning, 2012. "Choice and Coercion in East Asian Exchange Rate Regimes," Working Paper Series WP12-15, Peterson Institute for International Economics.
  2. Klaassen, Franc & Jager, Henk, 2011. "Definition-consistent measurement of exchange market pressure," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 74-95, February.
  3. Jarko Fidrmuc, 2010. "Time-Varying Exchange Rate Basket in China from 2005 to 2009," CESifo Working Paper Series 3147, CESifo Group Munich.
  4. Zhang, Zhichao & Shi, Nan & Zhang, Xiaoli, 2011. "China’s new exchange rate regime, optimal basket currency and currency diversification," BOFIT Discussion Papers 19/2011, Bank of Finland, Institute for Economies in Transition.
  5. Cibotaru, Vitalie & Neumann, Rainer & Cuhal, Radu & Ungureanu, Mihai, 2011. "Identificarea regimului cursului de schimb valutar în republica moldova," MPRA Paper 32232, University Library of Munich, Germany.
  6. Vitalie Ciubotaru, 2012. "Identifying the De Facto Exchange Rate Regime for Moldova: A State-Space Approach," Discussion Papers in Economics and Business 12-10, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  7. Thomas Willett & Eric M.P. Chiu & Sirathorn (B.J.) Dechsakulthorn & Ramya Ghosh & Bernard Kibesse & Kenneth Kim & Jeff (Yongbok) Kim & Alice Ouyang, 2011. "Classifying international aspects of currency regimes," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(4), pages 288-303, November.

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