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

15 Pages Posted: 5 Feb 2010 Last revised: 27 Jan 2011

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: February 4, 2010

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 ordinary least squares (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 estimate de facto exchange rate regimes: endogenous estimation of parameter breakpoints, following Bai and Perron (1998).

Keywords: Basket Peg, Currency, De Facto, De Jure, Exchange Rate, Exchange Market Pressure, Regime, Peso, Weights

JEL Classification: F31, F41

Suggested Citation

Frankel, Jeffrey A. and Xie, Daniel, Estimation of De Facto Flexibility Parameter and Basket Weights in Evolving Exchange Rate Regimes (February 4, 2010). Peterson Institute for International Economics Working Paper No. 10-1, Available at SSRN: https://ssrn.com/abstract=1547974 or http://dx.doi.org/10.2139/ssrn.1547974

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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