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Stochastic Regime Switching and Stabilizing Policies within Regimes
Author(s) -
Lewis Karen K.
Publication year - 1996
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/(sici)1099-1158(199604)1:2<71::aid-ijfe7>3.0.co;2-t
Subject(s) - stylized fact , economics , asset (computer security) , monetary policy , intervention (counseling) , exchange rate , monetary economics , econometrics , macroeconomics , computer science , psychology , computer security , psychiatry
This paper describes a class of stochastic stabilizing policies within asset price regimes; that can be easily incorporated into the framework of regime swtiching recently proposed by K. A. Froot and M. Obstfeld. In contrast to previous treatments of market‐driven fundamentals within the regime, authorities stochasstically counteract movements in these fundamentals before asset prices reach boundary points. This paper describes how the stabilizing intra‐regime intervention policies can be used to characterize the behaviour of monetary authorities before fixing an exchange rate, as in the cases studied by R. P. Flood and P. Garber. 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.