BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 15/2014:
The credibility of Hong Kong’s currency board system: Looking through the prism of MS-VAR models with time-varying transition probabilities
Boris Blagov ()
and Michael Funke ()
Abstract: This paper takes seriously the idea that the coefficients
of a VAR and the variance of shocks may be time-varying and so employs a
Markov regime-switching VAR model to describe and analyse the time-varying
credibility of Hong Kong’s currency board system. The endogenously
estimated discrete regime shifts are made dependent on macroeconomic
fundamentals. This enables us to determine which changes in macroeconomic
variables can trigger switches between the low and high credibility
regimes. We carry out extensive testing to search for the most appropriate
specification of the Markov regime-switching model. We find strong evidence
of regime switching behaviour that portrays the timevarying nature of
credibility in the historical data. Our own conditional volatility index
provides anticipatory signals and amplifies the regime-switching transition
probabilities.
Keywords: Markov regime-switching VAR; exchange rate regime credibility; Hong Kong; (follow links to similar papers)
JEL-Codes: C11; C32; F31; F41; (follow links to similar papers)
35 pages, August 25, 2014
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