Exchange Rate Dynamics Under Stochastic Regime Shifts: a Unified Approach

28 Pages Posted: 23 Apr 2004

See all articles by Kenneth Froot

Kenneth Froot

National Bureau of Economic Research (NBER); Harvard University - Business School (HBS)

Maurice Obstfeld

University of California, Berkeley; Peterson Institute for International Economics; National Bureau of Economic Research; Centre for Economic Policy Research

Date Written: February 1989

Abstract

Techniques of regulated Brownian motion are used to analyze the behavior of the exchange rate when official policy reaction functions are subject to future stochastic changes. We examine exchange-rate dynamics in alternative cases where the authorities promise (i) to confine a floating rate within a predetermined range and (ii) to peg the currency once it reaches a predetermined future level. Similarities between these and several related examples of regime switching are stressed

Suggested Citation

Froot, Kenneth and Obstfeld, Maurice, Exchange Rate Dynamics Under Stochastic Regime Shifts: a Unified Approach (February 1989). NBER Working Paper No. w2835. Available at SSRN: https://ssrn.com/abstract=447242

Kenneth Froot (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Harvard University - Business School (HBS) ( email )

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Maurice Obstfeld

University of California, Berkeley ( email )

530 Evans Hall #3880
Berkeley, CA 94720
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HOME PAGE: http://www.mauriceobstfeld.com

Peterson Institute for International Economics ( email )

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Washington, DC 20036
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National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research ( email )

London
United Kingdom

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