Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2011-02-11
Number: 11-030/2
Author-Name: Franc Klaassen
Author-Workplace-Name: University of Amsterdam
Title: Identifying the Weights in Exchange Market Pressure
Abstract: 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.
Classification-JEL: C26, E42, E58, F31, F33
Keywords: currency crisis models, ERM crisis, exchange rate regimes, instrumental variables, monetary policy, persistence
File-Url: https://papers.tinbergen.nl/11030.pdf
File-Format: application/pdf
File-Size: 254226 bytes
Handle: RePEc:tin:wpaper:20110030