Estimation of De Facto Flexibility Parameter and Basket Weights in Evolving Exchange Rate Regimes

22 Pages Posted: 4 Jan 2010 Last revised: 7 Mar 2022

See all articles by Jeffrey A. Frankel

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Daniel Xie

Peterson Institute for International Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 2009

Abstract

A new technique for estimating countries' de facto exchange rate regimes synthesizes two approaches. One approach estimates the implicit de facto basket weights in an OLS regression of the local currency value rate against major currency values. Here the hypothesis is a basket peg with little flexibility. The second estimates the de facto degree of exchange rate flexibility by observing how exchange market pressure is allowed to show up. Here the hypothesis is an anchor to the dollar or some other single major currency, but with a possibly substantial degree of exchange rate flexibility around that anchor. It is important to have available a technique that can cover both dimensions: inferring anchor weights and the flexibility parameter. We test the synthesis technique on a variety of fixers, floaters, and basket peggers. We find that real world data demand a statistical technique that allows parameters and regimes to shift frequently. Accordingly we here take the next step in estimation of de facto exchange rate regimes: endogenous estimation of parameter breakpoints, following Bai and Perron.

Suggested Citation

Frankel, Jeffrey A. and Xie, Daniel, Estimation of De Facto Flexibility Parameter and Basket Weights in Evolving Exchange Rate Regimes (December 2009). NBER Working Paper No. w15620, Available at SSRN: https://ssrn.com/abstract=1530076

Jeffrey A. Frankel (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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Daniel Xie

Peterson Institute for International Economics ( email )

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