Filters and GARCH Methods for Nonstationary Sequences and the Effect of New Exchange Rate Regime

After a long period of pegged, crawling or managed rates, Indonesia, Korea and Thailand have switched de jure to floating regimes after the 1997 Asian crisis. We focus on two issues: the volatility of exchange rates and the regime effect. Filters and GARCH type volatility models are applied to ascertain de facto variability in exchange rates. Vector autoregressive and error correction models are also used to clarify the regime effect. The initial results suggest a "floating regime along with risk management" in currency exposure, rather than the “fear of floating” or “return to pegging.”