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Stochastic Regime Switching and Stabilizing Policies within Regimes

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  • Lewis, Karen K

Abstract

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 K. A. Froot and M. Obstfeld. 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. This paper describes how the stabilizing intra-regime intervention policies can be used to characterize the behaviour of monetary authorities before fixing an exchange rate, as in the cases studied by R. P. Flood and P. Garber. 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. Copyright @ 1996 by John Wiley & Sons, Ltd. All rights reserved.

Suggested Citation

  • Lewis, Karen K, 1996. "Stochastic Regime Switching and Stabilizing Policies within Regimes," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(2), pages 71-85, April.
    • Handle: RePEc:ijf:ijfiec:v:1:y:1996:i:2:p:71-85
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    Cited by:

    1. Brandner, Peter & Grech, Harald & Stix, Helmut, 2006. "The effectiveness of central bank intervention in the EMS: The post 1993 experience," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 580-597, June.
    2. repec:onb:oenbwp:y::i:55:b:1 is not listed on IDEAS
    3. Lee, Hsiu-Yun & Lai, Hung-Pin, 2011. "A structural threshold model of the exchange rate under optimal intervention," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 931-946, October.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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