Regime-Switching in Exchange Rate Policy and Balance Sheet Effects

The authors apply regime-switching methods to a monetarist model of exchange rates and identify well-defined intervention policy cycles. The policy response indices include a standard exchange market pressure-based index and a model-based volatility ratio that is endogenized relative to Japan, assum...

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Bibliographic Details
Main Authors:	Fiess, Norbert, Shankar, Rashmi
Format:	Policy Research Working Paper
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ABSOLUTE VALUE ASSET MARKETS ASSET PRICES ASSETS AUTOREGRESSION BAD LOANS BALANCE OF PAYMENTS BALANCE SHEET BALANCE SHEET EFFECTS BENCHMARK BUSINESS CYCLE CAPITAL CONTROLS CAPITAL FLOWS CAPITAL INFLOWS CAPITAL LOSSES CAPITAL OUTFLOWS CENTRAL BANK CENTRAL BANKS CONTINGENT LIABILITIES COUNTRY SPECIFIC CRAWLING PEGS CREDIT BOOM CREDIT CONSTRAINT CREDITORS CRISIS EPISODES CURRENCY ASSETS CURRENCY BOARDS CURRENCY COMPOSITION CURRENCY CRISIS CURRENCY MARKETS CURRENT ACCOUNT CURRENT ACCOUNT DEFICIT DEBT DEBT ACCUMULATION DEBT DEFAULT DEPENDENT VARIABLE DESCRIPTIVE STATISTICS DEVALUATION DEVELOPING COUNTRIES DIRECT INTERVENTION DISEQUILIBRIUM DOMESTIC AGENTS DOMESTIC BANKS DOMESTIC CONSUMPTION DOMESTIC CURRENCY DOMESTIC INTEREST RATES DOMESTIC OUTPUT DOMESTIC PRICES DOMESTIC PRODUCERS ECONOMETRIC ANALYSIS ECONOMIC ENVIRONMENT ECONOMIC PERFORMANCE ECONOMICS ELASTICITY EMERGING MARKETS EMPIRICAL ANALYSIS EQUILIBRIUM EUROPEAN CENTRAL BANK EXCHANGE MARKET INTERVENTION EXCHANGE RATE EXCHANGE RATE POLICIES EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATE VARIABILITY EXCHANGE RATES EXCHANGE RISK EXPLANATORY VARIABLES EXTERNAL ASSETS EXTERNAL CREDIT EXTERNAL DEBT EXTERNAL FINANCING EXTERNAL LIABILITIES FINANCIAL ASSETS FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARIES FINANCIAL PERFORMANCE FINANCIAL PERFORMANCE INDICATORS FINANCIAL REGULATION FINANCIAL SECTOR FINANCIAL SYSTEM FIXED EFFECTS FIXED EXCHANGE FIXED EXCHANGE RATE FIXED EXCHANGE RATE REGIMES FORECASTS FOREIGN ASSETS FOREIGN CURRENCY FOREIGN CURRENCY DEBT FOREIGN DEBT FOREIGN INTEREST RATES FOREIGN INVESTORS GDP GROWTH RATE GROWTH RATES HIGH GROWTH HOME CURRENCY IMPLICIT GUARANTEES INCOME INCOME COUNTRIES INFLATION INSURANCE INTEREST RATE INTEREST RATES INTERNATIONAL BUSINESS INTERNATIONAL BUSINESS SCHOOL LENDER OF LAST RESORT LIQUID LIABILITIES LOW INFLATION MACROECONOMIC STABILITY MARKET RETURNS MARKET VOLATILITY MODEL SPECIFICATIONS MONETARY AUTHORITIES MONETARY EXPANSION MONETARY POLICY MONEY MARKET MONEY SUPPLY NEGATIVE IMPACT NEGATIVE SIGN OPEN ECONOMIES OPEN ECONOMY OUTPUT OUTPUT GROWTH OVERVALUATION PANEL REGRESSIONS POLICY INSTRUMENT POLICY INSTRUMENTS POLICY INTERVENTION POLICY MAKERS POLICY RESEARCH PORTFOLIO PORTFOLIOS PRICE STABILIZATION PRIVATE AGENTS PRIVATE CAPITAL PRIVATE SECTOR PURCHASING PURCHASING POWER PURCHASING POWER PARITY REAL EXCHANGE REAL EXCHANGE RATE RECESSION REGRESSION ANALYSIS RESERVE CHANGES RESERVE CURRENCY RESERVES RISK EXPOSURE RISK OF DEFAULT RISK PREMIUM SALE SPECULATION STABILIZATION STOCK MARKET STOCK MARKET INDEX STOCKS SUSTAINABILITY UNDERESTIMATES VOLATILITY VULNERABILITY
Online Access:	http://documents.worldbank.org/curated/en/2005/07/6027306/regime-switching-exchange-rate-policy-balance-sheet-effects http://hdl.handle.net/10986/8191

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Summary:	The authors apply regime-switching methods to a monetarist model of exchange rates and identify well-defined intervention policy cycles. The policy response indices include a standard exchange market pressure-based index and a model-based volatility ratio that is endogenized relative to Japan, assumed to be a "benchmark" floater. The authors find strong evidence that balance sheet effects, proxied by the stock ratio of external liabilities to assets, and economic performance, as measured by GDP and stock market indices, determine the cost of the regime shift. They use a panel of quarterly data from 1985 to 2004 for a sample of 15 countries, mostly in East Asia and Latin America.

Regime-Switching in Exchange Rate Policy and Balance Sheet Effects

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