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How integrated are the exchange markets of the Baltic Sea Region? An examination of market pressure and its contagion

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  • Scott W. Hegerty

    ()
    (Department of Economics, Northeastern Illinois University)

Abstract

In the two decades since independence, the Baltic nations’ re-integration with Western Europe has resulted in close linkages to the Euro. While only Estonia has as of yet joined the common currency, Latvia and Lithuania maintain currency pegs in preparation for membership. But although the Eurozone’s pull is unmistakable, it is possible that the Nordic countries on the Baltic Sea—with which the Baltics have enjoyed economic ties for centuries—might also have an important influence on the region’s exchange markets. In particular, currency crises might more easily spread through the Baltic Sea region than to and from the Eurozone. This study investigates this relationship by generating indices of Exchange Market Pressure (EMP) for the three Baltic countries, Denmark, Sweden, and the Eurozone, before testing for contagion using Vector Autoregressive (VAR) methods. Granger causality tests and impulse-response functions show that pressure on the Scandinavian currency markets, as well as stock price declines, lead to increased Baltic EMP more than do events in the Eurozone.

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Bibliographic Info

Article provided by Baltic International Centre for Economic Policy Studies in its journal Baltic Journal of Economics.

Volume (Year): 12 (2012)
Issue (Month): 2 (December)
Pages: 109-122

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Handle: RePEc:bic:journl:v:12:y:2012:i:2:p:109-122

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Related research

Keywords: exchange market pressure; contagion; vector autoregression; Baltics; Scandinavia;

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  1. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-48, September.
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  6. Boschi, Melisso, 2004. "International Financial Contagion: Evidence from the Argentine Crisis of 2001-2002," MPRA Paper 28546, University Library of Munich, Germany.
  7. מחקר - ביטוח לאומי, 1900. "שלמי תודה לשופטים בשנת 2008," Working Papers 984, National Insurance Institute of Israel.
  8. Hegerty, Scott W., 2009. "Capital inflows, exchange market pressure, and credit growth in four transition economies with fixed exchange rates," Economic Systems, Elsevier, vol. 33(2), pages 155-167, June.
  9. Heather D. Gibson & Euclid Tsakalotos, 2004. "Capital flows and speculative attacks in prospective EU member states," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 12(3), pages 559-586, 09.
  10. Scott Hegerty, 2011. "Is exchange-market pressure contagious among transition economies?," Applied Financial Economics, Taylor & Francis Journals, vol. 21(10), pages 707-716.
  11. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-84, December.
  12. PENTECOST, Eric J. & VAN HOOYDONK, Charlotte & VAN POECK, André, 1997. "Measuring and estimating exchange market pressure in the EU," SESO Working Papers 1997009, University of Antwerp, Faculty of Applied Economics.
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