Exchange market pressure: some caveats in empirical applications
AbstractThe Exchange Market Pressure (EMP) index, developed by Eichengreen et al. (1994), is widely used as a tool to signal whether pressure on a currency is softened or warded off through monetary authorities' interventions or, rather, a currency crisis has originated. In this article we show how the index is sensitive to some assumptions behind the aggregation of the information available (exchange rates, interest rates and reserves), especially when emerging countries are involved. Specifically, we address the way exchange rate variations are computed and the impact of different definitions of the reserves, and we question the constancy of the weights adopted. These issues compound with the choice of a fixed threshold when crisis episodes are identified through the EMP index. As a result, one should exert caution in subsequent econometric analyses where a dependent binary variable is built to identify crisis periods.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Economics.
Volume (Year): 42 (2010)
Issue (Month): 19 ()
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Other versions of this item:
- Simone Bertoli & Giampiero Gallo & Giorgio Ricchiuti, 2006. "Exchange Market Pressure: Some Caveats In Empirical Applications," Econometrics Working Papers Archive wp2006_17, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
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- Ahmad K Naimzada & Giorgio Ricchiuti, 2013. "Complexity with Heterogeneous Fundamentalists and a Multiplicative Price Mechanism," Working Papers Series wp2013_03.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze dell'Economia e Dell'Impresa.
- Cardarelli, Roberto & Elekdag, Selim & Kose, M. Ayhan, 2010.
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- Scott W. Hegerty, 2012. "How integrated are the exchange markets of the Baltic Sea Region? An examination of market pressure and its contagion," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 12(2), pages 109-122, December.
- Stavarek, Daniel, 2010. "Determinants of the exchange market pressure in the euro-candidate countries," MPRA Paper 26933, University Library of Munich, Germany.
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