Exchange Rate Dynamics Under Stochastic Regime Shifts: A Unified Approach
Techniques of regulated Brownian motion are used to analyze the behavior of the exchange rate when official policy reaction functions are subject to future stochastic changes. We examine exchange-rate dynamics in alternative cases where the authorities promise (i) to confine a floating rate within a predetermined range and (ii) to peg the currency once it reaches a predetermined future level. Similarities between these and several related examples of regime switching are stressed
|Date of creation:||Feb 1989|
|Date of revision:|
|Publication status:||published as Journal of International Economics, Vol. 31, pp. 203-229, (1991).|
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- Krugman, Paul R, 1991.
"Target Zones and Exchange Rate Dynamics,"
The Quarterly Journal of Economics,
MIT Press, vol. 106(3), pages 669-82, August.
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