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Exchange Market Pressure, Currency Crises, and Monetary Policy

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  • Evan Tanner

Abstract

This paper extends my previous work by examining the relationship between monetary policy and exchange market pressure (EMP) in 32 emerging market countries. EMP is a gauge of the severity of crises, and part of this paper specifically analyzes crisis periods. Two variables gauge the stance of monetary policy: the growth of central bank domestic credit and the interest differential (domestic versus U.S. dollar). Evidence suggests that monetary policy plays an important role in currency crises. And, in most countries the shocks to monetary policy affect EMP in the direction predicted by traditional approaches: tighter money reduces EMP.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/14.

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Length: 54
Date of creation: 01 Jan 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/14

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  1. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
  2. Michael R. Darby, 1978. "The Monetary Approach to the Balance of Payments: Two Specious Assumptions," UCLA Economics Working Papers 136, UCLA Department of Economics.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
  4. Robert P. Flood & Peter M. Garber & Charles Kramer, 1995. "Collapsing Exchange Rate Regimes: Another Linear Example," NBER Working Papers 5318, National Bureau of Economic Research, Inc.
  5. Ilan Goldfajn & Poonam Gupta, 1999. "Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis?," IMF Working Papers 99/42, International Monetary Fund.
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  7. Bensaid, B.B. & Jeanne, O., 1995. "The Instability of Fixed Exchange Rate Systems when Raising the Nominal Interest Rate is Costly," Papers 9536, Tilburg - Center for Economic Research.
  8. 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.
  9. International Monetary Fund, 1999. "Sources of Contagion," IMF Working Papers 99/146, International Monetary Fund.
  10. Amartya Lahiri & Carlos A. Vegh, 2000. "Delaying the Inevitable: Optimal Interest Rate Policy and BOP Crises," NBER Working Papers 7734, National Bureau of Economic Research, Inc.
  11. Amartya Lahiri & Carlos A. Végh, 2002. "Living with the Fear of Floating: An Optimal Policy Perspective," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 663-704 National Bureau of Economic Research, Inc.
  12. Timothy D. Lane & A. Javier Hamann & Marianne Schulze-Gattas & Ales Bulir & Steven Phillips & Atish R. Ghosh & Alex Mourmouras & Jack Boorman, 2000. "Managing Financial Crises," IMF Working Papers 00/107, International Monetary Fund.
  13. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring Monetary Policy," NBER Working Papers 5145, National Bureau of Economic Research, Inc.
  14. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
  15. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  16. Kloek, Tuen & van Dijk, Herman K, 1978. "Bayesian Estimates of Equation System Parameters: An Application of Integration by Monte Carlo," Econometrica, Econometric Society, vol. 46(1), pages 1-19, January.
  17. Brissimis, Sophocles N. & Leventakis, John A., 1984. "An empirical inquiry into the short-run dynamics of output, prices and exchange market pressure," Journal of International Money and Finance, Elsevier, vol. 3(1), pages 75-89, April.
  18. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  19. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
  20. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
  21. Weymark, Diana N., 1995. "Estimating exchange market pressure and the degree of exchange market intervention for Canada," Journal of International Economics, Elsevier, vol. 39(3-4), pages 273-295, November.
  22. Evan Tanner, 2001. "Exchange Market Pressure and Monetary Policy: Asia and Latin America in the 1990s," IMF Staff Papers, Palgrave Macmillan, vol. 47(3), pages 2.
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Citations

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Cited by:
  1. Komulainen, Tuomas & Lukkarila, Johanna, 2003. "What drives financial crises in emerging markets?," Emerging Markets Review, Elsevier, vol. 4(3), pages 248-272, September.
  2. International Monetary Fund, 2011. "Can Emerging Market Central Banks Bail Out Banks? A+L4848 Cautionary Tale From Latin America," IMF Working Papers 11/258, International Monetary Fund.
  3. Cipollini, A. & Kapetanios, G., 2009. "Forecasting financial crises and contagion in Asia using dynamic factor analysis," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 188-200, March.
  4. Andrea Cipollini & George Kapetanios, 2005. "Forecasting Financial Crises and Contagion in Asia Using Dynamic Factor Analysis," Working Papers 538, Queen Mary, University of London, School of Economics and Finance.
  5. Gochoco-Bautista, Maria Socorro & Bautista, Carlos C., 2005. "Monetary policy and exchange market pressure: The case of the Philippines," Journal of Macroeconomics, Elsevier, vol. 27(1), pages 153-168, March.
  6. M. Idrees Khawaja & Musleh-ud Din, 2007. "Instrument of Managing Exchange Market Pressure: Money Supply or Interest Rate," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 46(4), pages 381-394.
  7. Komulainen, Tuomas & Lukkarila, Johanna, 2003. "What drives financial crises in emerging markets?," BOFIT Discussion Papers 5/2003, Bank of Finland, Institute for Economies in Transition.
  8. Stavarek Daniel, 2008. "Exchange Market Pressure in Central European Countries from the Eurozone Membership Perspective," South East European Journal of Economics and Business, De Gruyter Open, vol. 3(2), pages 7-18, November.
  9. M. Idrees Khawaja, 2007. "Exchange Market Pressure and Monetary Policy: Evidence from Pakistan," PIDE-Working Papers 2007:31, Pakistan Institute of Development Economics.
  10. Stavarek, Daniel, 2006. "Estimation of the Exchange Market Pressure in the EU4 Countries: A Model-Dependent Approach," MPRA Paper 7256, University Library of Munich, Germany.
  11. Francis Y. Kumah, 2007. "A Markov-Switching Approach to Measuring Exchange Market Pressure," IMF Working Papers 07/242, International Monetary Fund.
  12. Paresh Kumar Narayan & Russell Smyth, 2006. "The dynamic relationship between real exchange rates, real interest rates and foreign exchange reserves: empirical evidence from China," Applied Financial Economics, Taylor & Francis Journals, vol. 16(9), pages 639-651.

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