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Regime-switching in exchange rate policy and balance sheet effects

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  • Fiess, Norbert
  • Shankar, Rashmi

Abstract

The authors apply regime-switching methods to a monetarist model of exchange rates and identify well-defined intervention policy cycles. The policy response indices include a standard exchange market pressure-based index and a model-based volatility ratio that is endogenized relative to Japan, assumed to be a"benchmark"floater. The authors find strong evidence that balance sheet effects, proxied by the stock ratio of external liabilities to assets, and economic performance, as measured by GDP and stock market indices, determine the cost of the regime shift. They use a panel of quarterly data from 1985 to 2004 for a sample of 15 countries, mostly in East Asia and Latin America.

Suggested Citation

  • Fiess, Norbert & Shankar, Rashmi, 2005. "Regime-switching in exchange rate policy and balance sheet effects," Policy Research Working Paper Series 3653, The World Bank.
    • Handle: RePEc:wbk:wbrwps:3653
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    Cited by:

    1. T. G. Saji, 2019. "Can BRICS Form a Currency Union? An Analysis under Markov Regime-Switching Framework," Global Business Review, International Management Institute, vol. 20(1), pages 151-165, February.
    2. Walter, Stefanie, 2008. "A New Approach for Determining Exchange-Rate Level Preferences," International Organization, Cambridge University Press, vol. 62(3), pages 405-438, July.

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    More about this item

    Keywords

    Economic Theory&Research; Economic Stabilization; Macroeconomic Management; Fiscal&Monetary Policy; Banks&Banking Reform;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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