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THE REGIME-DEPENDENT EVOLUTION OF CREDIBILITY: A FRESH LOOK AT HONG KONG'S LINKED EXCHANGE RATE SYSTEM

Published online by Cambridge University Press:  22 April 2018

Boris Blagov  and
Michael Funke
Boris Blagov*
Affiliation:
RWI – Leibniz Institute for Economic Research
Michael Funke
Affiliation:
Hamburg University and CESifo Munich
*
Address correspondence to: Boris Blagov, RWI – Leibniz Institute for Economic Research, Hohenzollerznstrasse 1-3, 45128, Essen, Germany; e-mail: boris.blagov@rwi-essen.de.
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Abstract

An estimated Markov-switching DSGE modeling framework that allows for parameter shifts across regimes is employed to test the hypothesis of regime-dependent credibility of Hong Kong's linked exchange rate system. The baseline model distinguishes two regimes with respect to the time-series properties of the risk premium. Regime-dependent impulse responses to macroeconomic shocks reveal substantial differences in spreads. To test the sensitivity of the results, a number of robustness checks are performed. The findings contribute to efforts at modeling exchange rate regime credibility as a nonlinear process with two distinct regimes.

Keywords

Markov-Switching DSGE ModelsExchange Rate Regime CredibilityInterest Rate Risk PremiaHong Kong
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 6 , September 2019 , pp. 2434 - 2468
Copyright
Copyright © Cambridge University Press 2018 

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Footnotes

We would like to thank William A. Barnett, two anonymous referees and an associate editor for valuable comments and suggestions on an earlier draft. The usual disclaimer applies.

References

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