Exchange Market Pressure, Currency Crises, and Monetary Policy: Additional Evidence from Emerging Markets

The purpose of this study is to determine the relationship between monetary policy and the exchange market pressure index in Turkey for the 2002–2018 period with monthly data. To obtain the foreign exchange market pressure index, this study uses the model developed by L. Girton and D.E. Roper and is based fundamentally on the monetary approach to exchange rate determination and the balance of payments. The calculated exchange market pressure index is in accordance with the developments lived in financial markets and changes in monetary policy during the period under investigation. As for the relation between exchange market pressure index and monetary policy, a VAR model was set up and a Granger type causality analysis was carried out. According to Granger causality test results, there is a unidirectional causality running from domestic credit expansion to exchange market pressure and from domestic credit expansion to interest rate differential while there is a bidirectional causality between exchange market pressure and interest rate differential. Since increasing exchange market pressure means a depreciation of the Turkish Lira, the estimated VAR model’s results support the view that the Central Bank will increase the interest rate to temper the exchange market pressure.

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Foreign exchange market pressure index and monetary policy in Iraq

Economic Annals ◽

10.2298/eka1819061k ◽

2018 ◽

Vol 63 (219) ◽

pp. 61-82

Author(s):

Ammar Khalaf

Keyword(s):

Monetary Policy ◽

Foreign Exchange ◽

Foreign Exchange Market ◽

Foreign Currency ◽

Series Data ◽

Policy Intervention ◽

Exchange Market ◽

Exchange Market Pressure ◽

Pressure Index ◽

Market Pressure

This paper?s aims are to adequately measure a foreign exchange market pressure index that can be used to discover pressures in the Iraqi foreign exchange market early on, and to examine the effect of monetary policy intervention in the Iraqi foreign exchange market. The modelling approach used is Autoregressive Distributed Lag (ARDL), with monthly time series data spanning 2013-2017. The index used in this paper was able to identify different periods of pressure in the Iraqi foreign exchange market. In addition, the econometric analysis found that the traditional proxies for monetary policy intervention in the foreign exchange market, such as domestic credit and money multiplier, were ineffective in the case of Iraq. The results show that the Central Bank of Iraq (CBI) relied extensively on foreign reserves to mitigate pressures in the foreign exchange market. Due to the nature of the Iraqi economy and where the main source of foreign currency is oil exports, the CBI adopted a fixed exchange rate regime to control inflationary expectations and stabilize the foreign exchange market.

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Exchange Market Pressure and Monetary Policy: Evidence from Pakistan

THE LAHORE JOURNAL OF ECONOMICS ◽

10.35536/lje.2007.v12.i2.a5 ◽

2007 ◽

Vol 12 (2) ◽

pp. 83-114

Author(s):

M. Idrees Khawaja

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Capital Mobility ◽

Foreign Currency ◽

Impulse Response Functions ◽

Exchange Market ◽

Exchange Market Pressure ◽

Domestic Credit ◽

The Interest Rate ◽

Market Pressure

The study employs the Girton and Roper (1977) measure of exchange market pressure (defined as the sum of exchange rate depreciation and foreign reserves outflow), to examine the interaction between exchange market pressure and monetary variables, viz. domestic credit (Reserve Money) and the interest rate. Evidence from impulse response functions suggests that domestic credit has remained the dominant tool of monetary policy for managing exchange market pressure. The increase in domestic credit upon increases in exchange market pressure (during 1991-98) was imprudent. The results suggest that fiscal needs/growth objectives might have dominated external account considerations during this period. Post 9/11 there is evidence of sterilized intervention in the forex market. The interest rate has also weakly served as the tool of monetary policy during the hay days of foreign currency deposits (1991-98). The finding implies that, for the interest rate to work as tool of monetary policy vis-a-vis exchange market pressure, a reasonable degree of capital mobility is called for.

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