Identifying the Weights in Exchange Market Pressure

Arbeitspapier

Exchange market pressure (EMP) measures the pressure on a currency to depreciate. It adds to the actual depreciation a weighted combination of policy instruments used to ward off depreciation, such as interest rates and foreign exchange interventions, where the weights are their effectiveness. The key difficulty in the literature is how to identify these weights. We exploit the persistence of pressure and add instruments based on currency crisis theories to identify the weights, and we propose a simple IV regression to estimate them. An application to the European Monetary System crisis in 1992-1993 shows that a one percentage point higher interest rate wards off a depreciation of about 0.2 percent.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. 11-030/2

Classification and Topics

• Classification: Wirtschaft ; Single Equation Models: Single Variables: Instrumental Variables (IV) Estimation ; Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems ; Central Banks and Their Policies ; Foreign Exchange ; International Monetary Arrangements and Institutions
• Subject: currency crisis models ; ERM crisis ; exchange rate regimes ; instrumental variables ; monetary policy ; persistence ; Währungskrise ; Wechselkurssystem ; Abwertung ; Eurozone ; Instrumentalvariablen-Schätzmethode ; EU-Staaten

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Klaassen, Franc
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/86757
• Last update: 10.03.2025, 11:43 AM CET