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

  • Boris Blagov (a1) and Michael Funke (a2)
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.

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Corresponding author
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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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.

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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
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