Definition-consistent measurement of exchange market pressure
Journal of International Money and Finance: theoretical and empirical research in international economics and finance , Volume 30 - Issue 1 p. 74- 95
Currencies can be under severe pressure, but in a managed exchange rate regime that is not fully visible via the change in the exchange rate. The literature has proposed a way to measure such exchange market pressure (EMP) indirectly, by adding interest rate changes and forex interventions to the exchange rate change. We demonstrate that this measure is not consistent with the definition of EMP and develop a new measure that is consistent. This is first derived within the commonly used monetary exchange rate model. Then we generalize the analysis by avoiding the use of an exchange rate model. We find that the interest rate should not be taken in the first-difference form used so far, but rather in level form and relative to the interest rate chosen if the country had no exchange rate objective. Applications on the European Monetary System and East Asian crises confirm that this improvement is highly relevant in practice.
|Asian crisis, ERM crisis, Exchange market pressure, Exchange rate regime, Generalized Taylor rule, Interest rate differential|
|Journal of International Money and Finance: theoretical and empirical research in international economics and finance|
|Article in press - dd Oktober 2010|
|Organisation||Erasmus School of Economics|
Klaassen, F, & Jager, H. (2010). Definition-consistent measurement of exchange market pressure. Journal of International Money and Finance: theoretical and empirical research in international economics and finance, 30(1), 74–95. doi:10.1016/j.jimonfin.2010.07.003