Identifying the De Facto Exchange Rate Regime for Moldova: A State-Space Approach

Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), Approach, Discussion Papers in Economics and Business, 12-10

40 Pages Posted: 13 Feb 2011 Last revised: 1 Jun 2012

Date Written: May 30, 2011

Abstract

It has been noted that there is an inconsistency between the Moldovan monetary authorities' 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 differs 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 significant weight.

Keywords: Exchange Rate Regime, Moldovan Leu, Frankel-Wei Regression, Kalman Filter, Empirical Fluctuation Process

JEL Classification: E42, F31, P33

Suggested Citation

Ciubotaru, Vitalie, Identifying the De Facto Exchange Rate Regime for Moldova: A State-Space Approach (May 30, 2011). Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), Approach, Discussion Papers in Economics and Business, 12-10. Available at SSRN: https://ssrn.com/abstract=1754427 or http://dx.doi.org/10.2139/ssrn.1754427

Vitalie Ciubotaru (Contact Author)

affiliation not provided to SSRN

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