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A Markov-Switching Approach to Measuring Exchange Market Pressure

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  • Mr. Francis Y Kumah

Abstract

This paper characterizes exchange market pressure as a nonlinear Markov-switching phenomenon, and examines its dynamics in response to money growth and inflation over three regimes. The empirical results identify episodes of exchange market pressure in the Kyrgyz Republic and confirm the statistical superiority of the nonlinear regime-switching model over a linear VAR version in understanding exchange market pressure. The nonlinear empirical approach adequately characterizes the data generation process and yields results that are consistent with theoretical predictions, particularly the dampening effect of monetary contraction on depreciation pressure. During periods of appreciation pressure, however, the reverse policy option-monetary expansion-may not be efficient, particularly where PPP rather than UIP drives exchange rates. In addition, monetary expansion in such cases defeats the primary objective of monetary policy-price stability-and may exacerbate the instability.

Suggested Citation

  • Mr. Francis Y Kumah, 2007. "A Markov-Switching Approach to Measuring Exchange Market Pressure," IMF Working Papers 2007/242, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2007/242
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    5. Unggul Heriqbaldi & Munawar Ismail & David Kaluge & Dwi Budi Santoso, 2014. "A Regime Switching Analysis Of Indonesia'S Exchange Market Pressure," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 59(02), pages 1-17.
    6. Imran Naveed Khan, 2010. "Exchange Market Pressure Index in Pakistan," SBP Working Paper Series 35, State Bank of Pakistan, Research Department.
    7. Ibrahim L. Awad, 2019. "Revisiting the Exchange Rate Pass-Through to Domestic Inflation in Egypt: Why Is the Statistical Association Weak in the Short Run?," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 18(1), pages 59-78, June.
    8. T. G. Saji, 2019. "Can BRICS Form a Currency Union? An Analysis under Markov Regime-Switching Framework," Global Business Review, International Management Institute, vol. 20(1), pages 151-165, February.
    9. Ibrahim L. Awad, 2019. "Revisiting the Exchange Rate Pass-Through to Domestic Inflation in Egypt: Why Is the Statistical Association Weak in the Short Run?," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 18(1), pages 59-77, June.

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