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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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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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Citations

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Cited by:
  1. Subramanian Arvind & Kessler Martin, 2013. "The Renminbi Bloc is Here: Asia Down, Rest of the World to Go?," Journal of Globalization and Development, De Gruyter, De Gruyter, vol. 4(1), pages 49-94, August.
  2. Martin Feldkircher & Roman Horvath & Marek Rusnak, 2013. "Exchange Market Pressures during the Financial Crisis: A Bayesian Model Averaging Evidence," Working Papers, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies) 332, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  3. Marc Pourroy, 2013. "Inflation-Targeting and Foreign Exchange Interventions in Emerging Economies," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00881359, HAL.
  4. C. Randall Henning, 2012. "Choice and Coercion in East Asian Exchange Rate Regimes," Working Paper Series, Peterson Institute for International Economics WP12-15, Peterson Institute for International Economics.
  5. Zhang, Zhichao & Shi, Nan & Zhang, Xiaoli, 2011. "China’s new exchange rate regime, optimal basket currency and currency diversification," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 19/2011, Bank of Finland, Institute for Economies in Transition.
  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. Jarko Fidrmuc, 2010. "Time-Varying Exchange Rate Basket in China from 2005 to 2009," CESifo Working Paper Series 3147, CESifo Group Munich.
  8. 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.
  9. Klaassen, Franc & Jager, Henk, 2011. "Definition-consistent measurement of exchange market pressure," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(1), pages 74-95, February.
  10. 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, Emerald Group Publishing, vol. 3(4), pages 288-303, November.

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