Stochastic Regime Switching and Stabilizing Policies within Regimes

36 Pages Posted: 1 Jul 2000 Last revised: 19 Mar 2008

See all articles by Karen K. Lewis

Karen K. Lewis

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: October 1995


This paper describes a class of stochastic stabilizing policies within asset price regimes that can be easily incorporated into the framework of regime switching recently proposed by Froot and Obstfeld (1991). In contrast to previous treatments of market-driven fundamentals within the regime, authorities stochastically counteract movements in these fundamentals before asset prices reach boundary points. The paper describes how the stabilizing intra-regime intervention policies can be used to characterize the behavior of monetary authorities before fixing an exchange rate, as in the case studied by Flood and Garber (1983). An intervention policy within target zone bands consistent with empirical evidence is also a member of this class of policies. Furthermore, the stylized features of these intervention policies may be matched to actual data in a natural way.

Suggested Citation

Lewis, Karen Kay, Stochastic Regime Switching and Stabilizing Policies within Regimes (October 1995). NBER Working Paper No. w5289, Available at SSRN:

Karen Kay Lewis (Contact Author)

University of Pennsylvania - Finance Department ( email )

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