The credibility of Hong Kong’s currency board system: Looking through the prism of MS-VAR models with time-varying transition probabilities

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Title: The credibility of Hong Kong’s currency board system: Looking through the prism of MS-VAR models with time-varying transition probabilities
Author: Blagov, Boris ; Funke, Michael
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 15/2014
Year of publication: 2014
Publication date: 25.8.2014
Published in: Published in Oxford Bulletin of Economics and Statistics, Vol. 78, 2016, pp. 895-914
Pages: 35
Subject (yso): valuuttakurssimekanismi; valuuttapolitiikka
Keywords: Bofit-kokoelma; Kiina; Hong Kong; valuuttakurssit; mallit
JEL: C11; C32; F31; F41
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. Publication keywords: Markov regime-switching VAR, exchange rate regime credibility, Hong Kong
Rights: https://helda.helsinki.fi/bof/copyright


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