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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 authorities f 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.

Suggested Citation

  • Vitalie Ciubotaru, 2012. "Identifying the De Facto Exchange Rate Regime for Moldova: A State-Space Approach," Discussion Papers in Economics and Business 12-10, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  • Handle: RePEc:osk:wpaper:1210
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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1210.pdf
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    References listed on IDEAS

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    1. Jeffrey Frankel & Daniel Xie, 2010. "Estimation of De Facto Flexibility Parameter and Basket Weights in Evolving Exchange Rate Regimes," American Economic Review, American Economic Association, vol. 100(2), pages 568-572, May.
    2. Tony Cavoli & Ramkishen S. Rajan, 2005. "Have Exchange Rate Regimes in Asia become More Flexible Post crisis? Re-VISITING the EVIDENCE," Finance Working Papers 22563, East Asian Bureau of Economic Research.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
    4. Ronald McKinnon & Gunther Schnabl, 2004. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Review of Development Economics, Wiley Blackwell, vol. 8(3), pages 331-360, August.
    5. 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.
    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, vol. 7(1), pages 23-35, April.
    7. repec:hrv:faseco:34721963 is not listed on IDEAS
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    Cited by:

    1. Shinji Takagi & Vitalie Ciubotaru, 2013. "Putting the Pieces Together: The Moldovan Exchange Rate Policy Puzzle," Research in Economics and Business: Central and Eastern Europe, Tallinn School of Economics and Business Administration, Tallinn University of Technology, vol. 5(1).

    More about this item

    Keywords

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

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • P33 - Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid

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