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Exchange market pressures during the financial crisis: A Bayesian model averaging evidence

  • Feldkircher, Martin

    ()

    (BOFIT)

  • Horvath, Roman

    ()

    (BOFIT)

  • Rusnak, Marek

    ()

    (BOFIT)

In this paper, we examine whether pre-crisis leading indicators help explain pressures on the exchange rate (and its volatility) during the global financial crisis. We use a unique data set that covers 149 countries and 58 indicators, and estimation techniques that are robust to model uncertainty. Our results are threefold: First and foremost, we find that price stability plays a pivotal role as a determinant of exchange rate pressures. More specifically, the currencies of countries that experienced higher inflation prior to the crisis tend to be more affected in times of stress. Second, we investigate potential effects that vary with the level of pre-crisis inflation. In this vein, our results reveal that domestic savings reduce the severity of pressures in countries that experienced a low-infation environment prior to the crisis. Finally, we find evidence of the mitigating effects of international reserves on the volatility of exchange rate pressures.

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File URL: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/2013/dp1113.pdf
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Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 11/2013.

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Length: 27 pages
Date of creation: 29 May 2013
Date of revision:
Handle: RePEc:hhs:bofitp:2013_011
Contact details of provider: Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
Web page: http://www.suomenpankki.fi/bofit_en/Email:


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