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Measuring Exchange Rate Flexiblity: A Two-Parameter Exchange Market Pressure Approach

Author

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  • THOMAS D. WILLETT

    (The Claremont Institute for Economic Policy Studies, The Claremont Colleges, 160 East 10th Street, Claremont, CA 91711, USA)

  • JEFF (YONGBOK) KIM

    (Bank of Korea, 110, 3-Ga, Namdaemunno, Jung-Gu, Seoul 100-794, Korea)

  • ISRIYA NITITHANPRAPAS BUNYASIRI

    (Department of Economics, Kasetsart University, Bangkok 10900, Thailand)

Abstract

Recognition that official classifications of exchange rate regimes are often misleading has led to considerable interest in behavioral measures. Many of these measures are related to the concept of exchange market pressure that shows how policy interventions affect how much a given change in excess demand in the foreign exchange market shows up changes in reserves versus changes in the exchange rate. We argue that this is the correct conceptual approach to measuring the degree of exchange rate flexibility of a regime, but that several of the most popular applications of this approach use functional forms that destroy useful information. One important problem that has been overlooked is that the approach is clearly defined only for leaning against the wind intervention and we find that fairly often changes in reserves and exchanges do not fit with this type of intervention. A second important issue is that where there are trends the interpretation of these types of measures becomes more difficult. We suggest that to deal with this issue a two parameter approach is needed rather than the one parameter measure that have been used in most of the previous literature. We illustrate the approach with an application to Japan.

Suggested Citation

  • Thomas D. Willett & Jeff (Yongbok) Kim & Isriya Nitithanprapas Bunyasiri, 2012. "Measuring Exchange Rate Flexiblity: A Two-Parameter Exchange Market Pressure Approach," Global Journal of Economics (GJE), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 1-28.
    • Handle: RePEc:wsi:gjexxx:v:01:y:2012:i:01:n:s2251361212500073
    DOI: 10.1142/S2251361212500073
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    References listed on IDEAS

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    1. Jeffrey Frankel & Shang-Jin Wei, 2008. "Estimation of De Facto Exchange Rate Regimes: Synthesis of the Techniques for Inferring Flexibility and Basket Weights," IMF Staff Papers, Palgrave Macmillan, vol. 55(3), pages 384-416, July.
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    Cited by:

    1. Hall, Stephen G. & Kenjegaliev, Amangeldi & Swamy, P.A.V.B. & Tavlas, George S., 2013. "Measuring currency pressures: The cases of the Japanese yen, the Chinese yuan, and the UK pound," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 1-20.
    2. Paolo Canofari & Giancarlo Marini & Giovanni Piersanti, 2014. "Measuring Currency Pressure and Contagion Risks in Countries under Monetary Unions: The Case of Euro," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 42(4), pages 455-469, December.
    3. Robert Dixon & Zhichao Zhang & Yang Dai, 2016. "Exchange Rate Flexibility in China: Measurement, Regime Shifts and Driving Forces of Change," Review of International Economics, Wiley Blackwell, vol. 24(5), pages 875-892, November.

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    More about this item

    Keywords

    Exchange market pressure; exchange rate regimes; foreign exchange reserves; intervention proxies; classification of exchange regimes; behavioral measures; E58; F31; F33; F41; F42; G15; G18;
    All these keywords.

    JEL classification:

    • 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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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