Exchange Market Pressure: Some Caveats In Empirical Applications
AbstractThe Exchange Market Pressure (EMP) Index, developed by Eichengreen et al. , is widely used to study currency crises as a tool to signal whether pressures on a currency are softened or warded off through monetary authorities’ interventions or whether a currency crisis has originated. In this paper 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 EMP. As a result, the dichotomous crisis variable thus derived when adopted as a dependent variable may lead to varied results in subsequent econometric analysis.
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Bibliographic InfoPaper provided by Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti" in its series Econometrics Working Papers Archive with number wp2006_17.
Date of creation: Oct 2006
Date of revision:
Other versions of this item:
- Simone Bertoli & Giampiero Gallo & Giorgio Ricchiuti, 2010. "Exchange market pressure: some caveats in empirical applications," Applied Economics, Taylor & Francis Journals, vol. 42(19), pages 2435-2448.
- NEP-ALL-2007-01-28 (All new papers)
- NEP-CBA-2007-01-28 (Central Banking)
- NEP-IFN-2007-01-28 (International Finance)
- NEP-MON-2007-01-28 (Monetary Economics)
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