TY  - JOUR
AU  - Lewis,Karen K.
TI  - Stochastic Regime Switching and Stabilizing Policies within Regimes
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5289
PY  - 1995
Y2  - October 1995
UR  - http://www.nber.org/papers/w5289
L1  - http://www.nber.org/papers/w5289.pdf
N1  - Author contact info:
Karen K. Lewis
Department of Finance, Wharton School
2300 SHDH
University of Pennsylvania
Philadelphia, PA 19104-6367
Tel: 215/898-7637
Fax: 215/898-6200
E-Mail: lewisk@wharton.upenn.edu
AB  - This paper describes a class of stochastic stabilizing policies within asset price regimes that can be easily incorporated into the framework of regime switching recently proposed by Froot and Obstfeld (1991).  In contrast to previous treatments of market-driven fundamentals within the regime, authorities stochastically counteract movements in these fundamentals before asset prices reach boundary points.  The paper describes how the stabilizing intra-regime intervention policies can be used to characterize the behavior of monetary authorities before fixing an exchange rate, as in the case studied by Flood and Garber (1983).  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.
ER  -