Stochastic Process Switching: Some Simple Solutions / Kenneth A. Froot, Maurice Obstfeld.

By:

Froot, Kenneth A

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w2998.Publication details: Cambridge, Mass. National Bureau of Economic Research 1989.Description: 1 online resource: illustrations (black and white)Subject(s):

F - International Economics

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Abstract: 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.

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Working Paper	Biblioteca Digital	Colección NBER	nber w2998 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w29977 Expectations Data in Asset Pricing /	nber w29978 Should Copula Endogeneity Correction Include Generated Regressors for Higher-order Terms? No, It Hurts /	nber w29979 Educational Inequality* /	nber w2998 Stochastic Process Switching: Some Simple Solutions /	nber w29980 AI, Trade and Creative Destruction: A First Look /	nber w29981 The Design of Defined Contribution Plans /	nber w29982 The Fed's International Dollar Liquidity Facilities: New Evidence on Effects /	Next

June 1989.

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.