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 Business School

Maurice Obstfeld

University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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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United States

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Maurice Obstfeld

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-643-9646 (Phone)
510-642-6615 (Fax)

HOME PAGE: http://emlab.berkeley.edu/users/obstfeld/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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