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Cost of floating exchange rates: Synthetic control estimation

This paper uses event study analysis and synthetic control estimation analysis to explore how the trend of the risk premium changes when a country breaks its exchange rate peg. We perform abnormal return and cumulative abnormal return estimations on daily fluctuations of country spread index, and synthetic control estimations on monthly observations with macroeconomic predictors. The overall results provide evidence that switching exchange rate regimes from fixed to floating incurs a statistically significant short-term increase in the average risk premium for 3-7 months.