Recovering Anchor Currencies and Decomposing Exchange Rate Behaviour into Component Regimes

Exchange rate regimes have evolved substantially over the years, right from the Gold Standard to the Bretton Woods era and post-Bretton Woods periods. The post-Bretton Woods era has seen the emergence of currency unions and a whole range of hybrid and sophisticated exchange rate regimes. This study attempts to recover the preferred anchor currencies of different countries and further uses a Markov-switching process to decompose exchange rate behaviour into component regimes. The regression-based results reveal the preferred anchor currencies while the Markov-switching results indicate that the model is able to decompose the currency behaviour of eight currencies into appreciating and depreciating regimes. Furthermore, the Markov results identify the key turning points in the exchange rate series, especially the 2008/2009 crisis period.