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A structural threshold model of the exchange rate under optimal intervention

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  • Lee, Hsiu-Yun
  • Lai, Hung-Pin

Abstract

By considering a social trade-off between targeting the exchange rate and minimizing intervention costs, nonlinear exchange rate dynamics can be captured by a structural threshold model. This article provides a theory-based empirical exchange rate model and shows how to put the model into an empirical investigation. To estimate the structural threshold model, we propose a two-step procedure which separately estimates the permanent and temporary fundamentals of the foreign exchange market. A demonstration of our approach is applied to 1981Q3-2008Q3 Taiwan's foreign exchange market, with a brief review of its monetary policies and central bank given prior. Estimation results are consistent with theoretical predictions and many intervention operations of Taiwan's central bank are successfully identified.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 6 (October)
Pages: 931-946

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:6:p:931-946

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Structural threshold model Exchange rate Managed float Intervention;

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