This paper describes a class of stochastic stabilizing policies within asset price regimes that can be easily incorporated into the framework of regime switching recently proposed by Froot and Obstfeld (1991). In contrast to previous treatments of market-driven fundamentals within the regime, authorities stochastically counteract movements in these fundamentals before asset prices reach boundary points. The paper describes how the stabilizing intra-regime intervention policies can be used to characterize the behavior of monetary authorities before fixing an exchange rate, as in the case studied by Flood and Garber (1983). An intervention policy within target zone bands consistent with empirical evidence is also a member of this class of policies. Furthermore, the stylized features of these intervention policies may be matched to actual data in a natural way.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5289.
Length: Date of creation: Oct 1995 Date of revision: Publication status: published as International Journal of Finance and Economics, April 1996, vol.1, pp.71-86 Handle: RePEc:nbr:nberwo:5289
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Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Bertola, Giuseppe & Caballero, Ricardo J, 1992.
"Target Zones and Realignments,"
American Economic Review,
American Economic Association, vol. 82(3), pages 520-36, June.
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