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Stock prices, foreign reserves, and regime collapse

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  • Chi-Chur Chao
  • Li-Ju Chen
  • Shih-Wen Hu
  • Ching-Yi Huang
  • Vey Wang

Abstract

Using a regime collapse model, this paper analyzes the impact of foreign financial disturbances in the foreign exchange market on the economy under the assumption of perfect foresight. When there are foreign financial disturbances and the amount of foreign exchange reserves reaches the threshold, the government contracts the domestic credit so as to prevent an additional decrease in foreign reserves. The results show that the relative scale of the threshold for foreign reserves influences the timing of the regime collapse, the extent of domestic credit contraction and the dynamic adjustment of the economy.

Suggested Citation

  • Chi-Chur Chao & Li-Ju Chen & Shih-Wen Hu & Ching-Yi Huang & Vey Wang, 2014. "Stock prices, foreign reserves, and regime collapse," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 21(2), pages 207-225, June.
    • Handle: RePEc:taf:raaexx:v:21:y:2014:i:2:p:207-225
    DOI: 10.1080/16081625.2014.886655
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    Cited by:

    1. Alhaji Jibrilla Aliyu & Shehu Mohammed Tijjani & Caroline Elliott, 2015. "Asymmetric cointegration between exchange rate and trade balance in Nigeria," Cogent Economics & Finance, Taylor & Francis Journals, vol. 3(1), pages 1045213-104, December.

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