TY  - JOUR
AU  - Froot,Kenneth A.
AU  - Obstfeld,Maurice
TI  - Stochastic Process Switching:  Some Simple Solutions
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2998
PY  - 1991
Y2  - August 1991
UR  - http://www.nber.org/papers/w2998
L1  - http://www.nber.org/papers/w2998.pdf
N1  - Author contact info:
Kenneth A. Froot
Graduate School of Business
Harvard University
Soldiers Field
Boston, MA 02163
Tel: 617/495-6677
Fax: 617/496-7357
E-Mail: kfroot@hbs.edu

Maurice Obstfeld
Department of Economics
University of California, Berkeley
530 Evans Hall #3880
Berkeley, CA 94720-3880
Tel: 510/643-9646
Fax: 510/642-6615
E-Mail: obstfeld@econ.berkeley.edu
AB  - When changes in the economic policy regime occur stochastically, asset prices will reflect the possibility of such shifts. In this paper we apply techniques of regulated Brownian motion to obtain closed-form analytic price solutions when policy reaction functions are subject to prospective changes. We focus on the case in which the authorities promise to peg a currency's exchange rate once it reaches a predetermined future level. We also show how an open-ended commitment to exchange-rate targeting may lead to multiple equilibria.
ER  -