Identifying the Weights in Exchange Market Pressure
AbstractExchange market pressure (EMP) measures the pressure on a currency to depreciate. It adds to the actual depreciation a weighted combination of policy instruments used to ward off depreciation, such as interest rates and foreign exchange interventions, where the weights are their effectiveness. The key difficulty in the literature is how to identify these weights. We exploit the persistence of pressure and add instruments based on currency crisis theories to identify the weights, and we propose a simple IV regression to estimate them. An application to the European Monetary System crisis in 1992-1993 shows that a one percentage point higher interest rate wards off a depreciation of about 0.2 percent.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-030/2.
Date of creation: 11 Feb 2011
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Web page: http://www.tinbergen.nl
currency crisis models; ERM crisis; exchange rate regimes; instrumental variables; monetary policy; persistence;
Other versions of this item:
- Franc Klaassen, 2011. "Identifying the Weights in Exchange Market Pressure," Tinbergen Institute Discussion Papers 11-020/2, Tinbergen Institute.
- C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-26 (All new papers)
- NEP-CBA-2011-02-26 (Central Banking)
- NEP-MAC-2011-02-26 (Macroeconomics)
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