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, 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.

Bibliographic Details

Main Authors:	Fiess, Norbert, Shankar, Rashmi
Language:	English
Published:	World Bank, Washington, DC 2005-07
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 https://hdl.handle.net/10986/8191
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