Where Does the Meteor Shower Come from? the Role of Stochastic Policy Coordination
32 Pages Posted: 8 Jan 2008 Last revised: 10 Aug 2010
Date Written: October 1990
The purpose of this paper is to examine the intra-daily volatility of the yen/dollar exchange rate over three different regimes from 1979 to 1988 which correspond to different degrees of international policy coordination. In each regime we test for heat wave vs. meteor shower effects. The heat wave hypothesis assumes that volatility has only country specific autocorrelations, while the meteor shower hypothesis allows volatility spillovers from one market to the next. Meteor showers can be caused by stochastic policy coordination, by gradual release of private information, or by market failures such as fads, bubbles or bandwagons. The rejection of the heat wave model over the first half of the 1980s discredits the stochastic policy coordination interpretation because there was little policy coordination among industrial countries prior to the Plaza Agreement in 1985.
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