Exchange Rate Dynamics Under Stochastic Regime Shifts: A Unified Approach

Kenneth A. Froot, Maurice Obstfeld

NBER Working Paper No. 2835 (Also Reprint No. r1723)
Issued in June 1992
NBER Program(s):   ITI   IFM

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

(302 K)

(202 K)

Published: Journal of International Economics, Vol. 31, pp. 203-229, (1991).

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