Essays on speculative attacks on fixed exchange rate regimes, speculative bubbles and endogenous switching regime estimation

Sola, Martin (1991) Essays on speculative attacks on fixed exchange rate regimes, speculative bubbles and endogenous switching regime estimation. University of Southampton, Doctoral Thesis.

Abstract

This thesis has seven chapters grouped in two parts. The first three chapters are theoretically based and consider the literature of speculative attacks on fixed exchange rate regimes. The literature is briefly surveyed in Chapter 1. In Chapter 2 we extend some of the established models, and are particularly concerned with the relationship between the government financing of the deficit and the occurrence of speculative attacks. Chapter 3 examines the consequences of including disposable income in the demand for money, and considers how an increase in taxes affects inflation when the deficit is financed by inflationary taxation. The second part of the dissertation is concerned with the estimation of models subject to changes in regime. In Chapter 4 we present Hamilton's (1988) filter and simulate data to examine how it performs under different circumstances. We also discuss the need for the data series to be stationary in order to apply this filter. In Chapter 5 we test the term structure of interest rates using different approaches and provide a testing procedure that enables us to use Hamilton filter. In Chapter 6 we present a method for testing for bubbles that solves the well-known problem of bubbles being confused with fundamentals when there is an expected change in regime. Finally in Chapter 7 we provide a multivariate extension to Hamilton's filter.

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