IDEAS home Printed from https://ideas.repec.org/p/sce/scecf5/117.html
   My bibliography  Save this paper

Long Swings in the US-Dollar: a Stochastic Control Approach

Author

Listed:
  • Rita L. D’Ecclesia
  • Rosella Castellano

Abstract

Since 1973 currency market has been dominated by US-Dollar cycles, the so called long swings. The long swinging behaviour of the dollar has been confirmed also by its strong depreciation against the Euro, registered in the last three years. Periods of steady appreciation followed by period of consistent depreciation causes structural breaks and non linearity in the US-Dollar exchange rate which are not reflected in the standard exchange rate models. The aim of this paper is to use a stochastic control method to describe the US-Dollar dynamic. We assume that the long swings are caused by Monetary Authorities interventions that can affect a set of macroeconomics variables – fundamentals – which follow a stochastic process with state dependent drifts. The drift is the control variable available to the decision makers to prevent the fundamentals to move too far from time varying targets and to influence the long term exchange rate evolution. When the value of the fundamentals is too distant from the specified target, Monetary Authorities interventions trigger the drift of the process to move in the planned direction, shaping a switch from an appreciating cycle to a depreciating one (and vice versa). Solving a system of non linear equations, the switching points of the optimally controlled process are endogenously identified. We also provide a validation of the model, in order to show how it can succeed in detaining all the main switching points.

Suggested Citation

  • Rita L. D’Ecclesia & Rosella Castellano, 2005. "Long Swings in the US-Dollar: a Stochastic Control Approach," Computing in Economics and Finance 2005 117, Society for Computational Economics.
  • Handle: RePEc:sce:scecf5:117
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item

    Keywords

    Long Swings; Stochastic Control; Simulation;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecf5:117. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christopher F. Baum (email available below). General contact details of provider: https://edirc.repec.org/data/sceeeea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.