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Identifying the Weights in Exchange Market Pressure

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  • Franc Klaassen

    (University of Amsterdam)

Abstract

Exchange market pressure (EMP) measures the pressure on a currencyto depreciate. It adds to the actual depreciation a weightedcombination of policy instruments used to ward off depreciation,such as interest rates and foreign exchange interventions, where theweights are their effectiveness. The key difficulty in the literature ishow to identify these weights. We exploit the persistence of pressureand add instruments based on currency crisis theories to identify theweights, and we propose a simple IV regression to estimate them.An application to the European Monetary System crisis in 1992-1993shows that a one percentage point higher interest rate wards off adepreciation of about 0.2 percent.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-020/2.

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Date of creation: 11 Feb 2011
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Handle: RePEc:dgr:uvatin:20110020

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Web page: http://www.tinbergen.nl

Related research

Keywords: currency crisis models; ERM crisis; exchange rate regime; instrumental variables; monetary policy; persistence;

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