Premium
The Credibility of Hong Kong's Currency Board System: Looking Through the Prism of MS‐VAR Models with Time‐Varying Transition Probabilities
Author(s) -
Blagov Boris,
Funke Michael
Publication year - 2016
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12148
Subject(s) - credibility , markov chain , currency , carry (investment) , econometrics , economics , currency board , monetary economics , macroeconomics , computer science , political science , law , machine learning
This paper employs a Markov regime‐switching VAR model to describe and analyse the time‐varying credibility of Hong Kong's currency board system. The endogenously estimated discrete regime shifts are made dependent on macroeconomic fundamentals. This enables us to determine which changes in macroeconomic variables can trigger switches between the low and high credibility regimes. We carry out extensive testing to search for the most appropriate specification of the Markov regime‐switching model. We find strong evidence of regime switching behaviour that portrays the time‐varying nature of credibility in the historical data.