Exchange rate dynamics in anticipation of time-contingent regime switching: modelling the effects of a possible delay

The procedure of fixing a currently floating exchange rate at a given (and publicly announced) future date has a broad range of applications. Based on a (continuous-time) monetary exchange rate model with flexible prices, thi s paper analyzes exchange rate dynamics during the transition from floating to fixed rates in a situation in which market participants are uncertain a bout adherence to the fixing date and in which they take account of a possi ble delay in the regime switch. The closed-form solutions derived here allo w us to quantify announcement effects as well as effects on the exchange ra te variance caused by news that significantly changes the market's assessme nt of uncertainty. (C) 2001 Elsevier Science Ltd. All rights reserved. JEL classification: F31; F33.