Working Paper: NBER ID: w2835
Authors: Kenneth A. Froot; Maurice Obstfeld
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
Keywords: exchange rates; stochastic processes; policy interventions
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| policy interventions (D78) | exchange rate behavior (F31) |
| macroeconomic fundamentals (E66) | exchange rate path (F31) |
| policy shifts (E65) | macroeconomic fundamentals (E66) |