Exchange rate regime transitions

The "hollowing-out", or "two poles" hypothesis is tested in the context of a Markov chain model of exchange rate transitions. Ln particular, two versi ons of the hypothesis-that hard pegs are an absorbing state, or that fixes and floats form a closed set, with no transitions to intermediate regimes-a re tested using two alternative classifications of regimes. While there is some support for the lack of exits from hard pegs (i.e. that they are an ab sorbing state), the data generally indicate that the intermediate cases wil l continue to constitute a sizable fraction of actual exchange rate regimes . (C) 2001 Elsevier Science B.V. All rights reserved.