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A monetary approach to the exchange market pressure index under capital control

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  • Jie Li

Abstract

The conventional Exchange Market Pressure Index (EMPI), originated from Girton and Roper (1977) and popularized by Eichengreen et al. (1994, 1995) and Weymark (1995), uses weighted average of loss of foreign reserves and depreciation of local currency to capture foreign exchange market pressure. However, it does not take into account the effect of capital control on foreign exchange market pressure. With effective capital control, the conventional EMPI tends to under- or overestimate the actual foreign exchange market pressure, depending on the magnitude of capital control. We adopt a monetary approach to derive a formula for new EMPI under capital control. Then we test the difference between the old and the new EMPI with China's data. The result shows that the conventional EMPI overestimates the actual foreign exchange market pressure by 91% in average.

Suggested Citation

  • Jie Li, 2012. "A monetary approach to the exchange market pressure index under capital control," Applied Economics Letters, Taylor & Francis Journals, vol. 19(13), pages 1305-1309, September.
    • Handle: RePEc:taf:apeclt:v:19:y:2012:i:13:p:1305-1309
    DOI: 10.1080/13504851.2011.624079
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    References listed on IDEAS

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    1. Aizenman, Joshua & Hutchison, Michael, 2010. "Exchange Market Pressure and Absorption by International Reserves: Emerging Markets and Fear of Reserve Loss During the 2008-09 Crisis," Santa Cruz Department of Economics, Working Paper Series qt8g25f4qs, Department of Economics, UC Santa Cruz.
    2. Spolander, Mikko, 1999. "Measuring exchange market pressure and central bank intervention," Scientific Monographs, Bank of Finland, number 17/1999.
    3. Menzie D. Chinn & Guy Meredith, 2005. "Testing Uncovered Interest Parity at Short and Long Horizons during the Post-Bretton Woods Era," NBER Working Papers 11077, National Bureau of Economic Research, Inc.
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    1. Cavoli, Tony & Rajan, Ramkishen S., 2015. "Capital inflows and the interest premium problem: The effects of monetary sterilisation in selected Asian economies," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 1-18.
    2. Chen, Jinzhao & Qian, Xingwang, 2016. "Measuring on-going changes in China's capital controls: A de jure and a hybrid index data set," China Economic Review, Elsevier, vol. 38(C), pages 167-182.

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