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Identifying the De Facto Exchange Rate Regime for Moldova: A State-Space Approach

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  • Vitalie Ciubotaru

    ()
    (Graduate School of Economics, Osaka University)

Abstract

It has been noted that there is an inconsistency between the Moldovan monetary authoritiesf declared pursuit of price stability and the de facto exchange rate peg. This paper looks into the exchange rate regime of the Moldovan leu (MDL) aiming to identify the de facto regime, to test whether it differes from the de jure regime stipulated by legislation, whether it can be described by a basket peg (and, if so, to determine the composition of this basket), and whether the regime has been stable over time. The methodology used in our analysis is the celebrated Frankel-Wei regression, to which we apply a Kalman filter algorithm. We show that the MDL generally follows a peg to the US dollar with varying implicit weight and fluctuation bands. Surprisingly, despite the large share of euro-denominated transactions on the Moldovan exchange market, and an even larger share of euro-denominated assets, the euro has never exhibited any statistically signicant weight.

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Bibliographic Info

Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 12-10.

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Length: 40 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:osk:wpaper:1210

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Keywords: Exchange Rate Regime; Moldovan Leu; Frankel-Wei Regression; Kalman Filter; Empirical Fluctuation Process;

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  1. Ronald McKinnon & Gunther Schnabl, 2004. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 8(3), pages 331-360, 08.
  2. Frankel, Jeffrey & Xie, Daniel, 2010. "Estimation of De Facto Flexibility Parameter and Basket Weights in Evolving Exchange Rate Regimes," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp10-003, Harvard University, John F. Kennedy School of Government.
  3. Tony Cavoli & Ramkishen S. Rajan, 2005. "Have Exchange Rate Regimes in Asia Become More Flexible Post Crisis? Re-visiting the Evidence," School of Economics Working Papers, University of Adelaide, School of Economics 2005-06, University of Adelaide, School of Economics.
  4. Benassy-Quere, Agnes & Coeure, Benoit & Mignon, Valerie, 2006. "On the identification of de facto currency pegs," Journal of the Japanese and International Economies, Elsevier, vol. 20(1), pages 112-127, March.
  5. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
  6. Imad A. Moosa, 2008. "Forecasting the Chinese Yuan-US Dollar Exchange Rate under the New Chinese Exchange Rate Regime," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 7(1), pages 23-35, April.
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